According to Tianfeng Securities Co.,Ltd., the banking sector has traded below book value for seven consecutive years since March 23, 2018. On July 12, 2024, the dividend yield reached 7.26%, marking the highest level in nearly a decade and exceeding the 10-year government bond yield by 5.00 percentage points.

Based on calculations, the current theoretical PB ratio for banking stocks corresponds to approximately 0.63x based on ROE levels. To return to a PB valuation of 1.0x, the ROE would theoretically need to reach approximately 14.15%. As of August 18, 2025, following multiple rounds of valuation recovery, the CITIC secondary banking sector has seen a 32.53% valuation increase over the past year, with a PB (LF) of 0.72x and ROE (TTM) of 8.92%. Compared to other secondary sectors, banking industry valuations remain below the overall PB-ROE trend.

Tianfeng Securities Co.,Ltd. identifies three primary reasons for the banking sector's persistent trading below book value: asset quality risk exposure, declining profitability, and asset expansion speeds significantly higher than other industries, which drags down valuations.

**Asset Quality Risk Exposure Leading to Market "Discount" on Banking Asset Valuations**

The PB ratio formula represents the proportion of stock price to book value per share, where PB=1 indicates that each 1 yuan investment yields 1 yuan of net assets. From a formula perspective, the long-term trading below book value of banking stocks may indicate that the market believes each 1 yuan invested in banking stocks should yield more than 1 yuan in book value per share, or that investors consider the book value per share of banking stocks requires a certain discount. This reflects deep considerations about current and future asset quality issues in banking stocks.

Looking back at the beginning of the banking sector's long-term trading below book value cycle, in 2018 and 2020, the year-over-year growth rates of non-performing loans and credit scale in the banking industry experienced "inversions." From Q1 2018 to Q1 2019, and from end-2019 to Q3 2020, the growth rates of non-performing loans and credit scale were inverted (where the difference between credit growth and NPL growth was negative). Both inversion cycles lasted approximately one year, with peaks reaching -8.20% to -8.46%. The non-performing loan balances increased by 451.4 billion and 467.8 billion yuan respectively during these two cycles, equivalent to 20.93% and 16.50% of the non-performing scale in the same periods.

From mid-2023 to present, under a low interest rate and loose credit environment, new non-performing assets have remained generally stable, but asset quality pressure in the retail segment has gradually emerged. This may be the main reason for the market's "discount" on the actual value of banking industry assets.

**Declining Banking Revenue Capabilities Leading to Future Value "Discount"**

Considering the correlation between banking stock valuations and operational fundamentals, the PB-ROE single-stage sustainable growth valuation model reveals the relationship between ROE and banking PB valuations. According to calculations, the current theoretical PB corresponding to banking stock ROE is approximately 0.63x. To return to a PB=1 valuation level would theoretically require an ROE of approximately 14.15%.

Comparing with 2016 levels of listed bank DuPont analysis indicators: Q1 2025 average net interest margin, interest-earning asset ratio, non-interest income ratio, and non-interest income scale were -70bp, -63bp, +17.66pct, and +341.29pct respectively compared to end-2016 levels. Q1 2025 average business and management expenses and provision scale increased by 40.22% and 70.55% respectively compared to Q1 2016.

**High Growth in Book Value Per Share Creates Denominator Pressure on PB Valuations Under Current Operating Pressures**

On one hand, banking industry profitability has shown a declining trend year by year due to "volume compensating for price" operations under low interest rate environments and increased write-off needs from some asset quality risk exposures. Therefore, the expansion of book value per share may have limited appeal to investors. On the other hand, during overall economic volatility, such as state-owned banks playing a "leading goose role" by increasing credit lending, banking stock PB valuations may be undervalued to varying degrees due to market concerns about banking asset quality and expectations of potential economic volatility.

**Risk Warning:** Calculations may deviate from actual conditions; macroeconomic volatility may increase banking operational pressures.