The ability to navigate economic cycles and build new competitive moats is not only a test of a bank's strategic resolve but also a decisive variable in whether its valuation can genuinely bottom out and recover.

A record-breaking wave of cash dividends is being distributed across the A-share banking sector. On July 10th, Bank of China, Bank of Communications, China Merchants Bank, Bank of Jiangsu, Bank of Beijing, and Bank of Xi'an executed their dividend payments, involving a single-day capital outflow of 88.445 billion yuan. This brings the total number of listed banks that have completed their payouts since the start of July to 11, with an additional 8 banks having their dividend plans scheduled.

Overall, among the 42 A-share listed banks, with the exception of Bank of Zhengzhou which did not pay a dividend, the other 41 banks distributed a total of 345.872 billion yuan in cash dividends for the end of 2025. The full-year cumulative dividend amount reached 645.637 billion yuan, an increase of 13.5 billion yuan from 2024, setting another historical record. Thirteen banks had an annual dividend payout ratio exceeding 30%, while another 16 banks had a payout ratio above 25%. Based on the closing prices on July 9th, 34 banks have a dividend yield surpassing 4%, with 15 of those exceeding 5%.

High dividend yields and substantial payouts have become the most prominent features of the banking sector. However, after two consecutive years of broad market gains, bank stocks entered a "correction phase" in 2026. According to Wind data, as of the close on July 9th, 33 out of the 42 A-share listed banks saw their share prices decline, accounting for 78.57% of the sector. Among them, 12 banks saw their 2026 declines already exceed their full-year gains from 2025. Meanwhile, the 6 banks whose share prices fell in 2025 continued their downward trend in 2026.

Market observers widely attribute the year-to-date weakness in bank stocks to a style rotation. Since the start of 2026, market preference has shifted from "defensive" to "growth," with leading technology and energy stocks attracting strong capital inflows. Financial sectors like banking have been systematically de-weighted during this style shift. With institutional underweighting, the entire sector has returned to a state where all stocks trade below their book value.

However, attributing the steady decline in share prices entirely to "style rotation" is an oversimplification. In reality, the banking industry is mired in an unavoidable operational transition period. The era of easy profits is over. Pressured net interest margins, evolving asset quality, and the reshaping of credit structures are multiple variables intertwining, narrowing the pathways that banks previously relied on for survival. The ability to navigate economic cycles and build new competitive moats is not only a test of a bank's strategic resolve but also a decisive variable in whether its valuation can genuinely bottom out and recover.

Improving Fundamentals, Weakening Share Prices

"They performed so well last year, why aren't they working this year?" As a seasoned investor in bank stocks, Wu Wei is troubled by this year's returns from the sector: while the large state-owned banks have managed to maintain profitability, some national joint-stock banks have shown little to be desired. What she finds most perplexing is that despite the recovery in bank earnings, share prices are showing signs of fatigue.

According to Wu Wei's initial plan, bank stocks were meant to play the role of a "ballast" in her overall investment portfolio. In 2025, this strategy proved quite effective—bank stocks contributed a respectable return of over 10%, and when combined with the approximately 30% high dividend payout ratio, the comprehensive rate of return significantly outperformed other sectors.

For this very reason, at the start of 2026, she was confident that even if market styles shifted, blue-chip bank stocks would not cause too much turbulence. However, reality delivered a heavy blow: declines in some bank stocks not only erased all the profits from 2025 but also began to erode her principal capital. Faced with the continuous shrinkage of her account, selling off some bank stocks at a loss became Wu Wei's reluctant choice.

Wind data shows that since the start of 2026, bank share prices have experienced a broad-based decline. In the second quarter of 2026 alone, the Shenwan Bank Index fell by 9.1%.

Looking at individual stocks, as of July 6th, among the 33 banks with declining share prices in 2026, Shanghai Pudong Development Bank fell by over 27.8%, and Agricultural Bank of China declined by 18.9%. Both of these banks had experienced exceptionally strong performance over the previous two years.

Specifically, Agricultural Bank of China's share price rose by over 50% for two consecutive years, hitting a historical high in 2025, with its market capitalization once surpassing that of Industrial and Commercial Bank of China. Shanghai Pudong Development Bank's share price rose by 61.14% in 2024 and continued to climb by 24.56% in 2025. This implies that the 2026 downtrend represents a correction following the strong performance of bank stocks over the past two years. Meanwhile, several banks, including Bank of Zhengzhou and China Minsheng Bank, continued their share price declines from 2025 due to poor performance.

Nevertheless, nine banks saw their share prices continue to rise in 2026, charting an independent course. China Construction Bank's share price increased by 6.57% in 2026, repeatedly hitting new highs between May and June, with its market capitalization once exceeding 2.8 trillion yuan. Bank of Qingdao saw its share price surge by 24.93% this year. Previously, Guoxin Industry Finance Holding significantly increased its holdings of Bank of Qingdao's H-shares through the Stock Connect program, raising its stake to 19.17% to become the largest shareholder, and committed to not transferring the shares for five years.

Contrary to the overall adjustment in share prices, the fundamental performance of banks has been recovering. For the full year 2025, the 42 A-share listed banks reported a combined net profit attributable to parent company shareholders of 2.17 trillion yuan, a year-on-year increase of 1.44%. In the first quarter of 2026, net profit exceeded 0.58 trillion yuan, with the year-on-year growth rate expanding to 3%. A significant recovery in non-interest income was a primary driver.

Based on the first-quarter 2026 results of listed banks, 34 out of the 42 banks achieved "double growth" in both revenue and net profit. Marginal improvement in net interest margins also serves as evidence: some banks saw their net interest margins rise in the first quarter. For instance, Bank of Guiyang's net interest margin recovered to 1.66%, an increase of 8 basis points from the end of 2025, reversing the trend of consecutive narrowing over the past three years.

Market Style Rotation Masks Underlying Development Concerns

With fundamentals steadily recovering and dividend returns remaining generous, bank stocks appear to possess the necessary conditions for quality assets. Why, then, does a "temperature gap" persist between share prices and performance? The industry attributes the widespread decline in bank stocks to market style rotation.

Yang Delong, Chief Economist at Qianhai Kaiyuan Fund, believes the core reason for the weak performance of bank stocks in 2026 lies in a systematic shift in market focus. Since the start of 2026, capital has clearly tilted towards leading technology and energy sectors. After the significant rally in 2025, the banking sector had accumulated substantial profit-taking pressure. The combination of these two factors made a correction inevitable.

It is worth noting that while the recovery in bank earnings is a fact, underlying concerns have not dissipated. For example, bank net interest margins have still not fully bottomed out. Data released by the National Financial Regulatory Administration shows that in the first quarter of this year, the net interest margin for Chinese commercial banks fell to a historical low of 1.4%.

The first-quarter 2026 reports of listed banks also reflect the instability of the margin recovery. Some banks had just shown signs of stabilization in their net interest margins in the fourth quarter of 2025, only to face renewed pressure in the first quarter of 2026. Taking China Merchants Bank as an example, the bank's net interest margin pressure showed a sequential improvement in Q4 2025, but returned to a downward trajectory in Q1 2026.

"Although bank net interest margins have shown marginal improvement, pressure remains, and banks must continue to reduce liability costs," an insider at a city commercial bank stated. Currently, measures like optimizing deposit structures remain a "top priority" for banks in the second half of 2026.

Simultaneously, structural changes on the credit side cannot be ignored. Data from the People's Bank of China shows that new bank loan growth remained sluggish in 2026, turning negative in April, a rare occurrence. Multiple institutions anticipate that despite the mid-year period being a traditional peak season for lending, demand remains weak year-on-year.

Retail credit is bearing the brunt. Non-performing loans in credit cards, business loans, and consumer loans continue to surface. What were once "volume drivers" are now turning into areas of risk pressure.

"Lending is becoming less and less profitable," revealed a retail credit department head at a joint-stock bank's Beijing branch. Coupled with insufficient effective credit demand, banks are no longer blindly extending loans just to boost scale. Instead, they are tightening risk control bottom lines more strictly due to the rise in non-performing loans.

The corporate side is also not optimistic, with multiple institutions expecting corporate loan growth in June to continue its year-on-year slowdown. Authoritative experts point out that this stems from a deeper shift in financing models. The previous path of heavy-asset expansion driven by infrastructure and real estate is weakening. As the economy transitions towards lighter-asset, technology-oriented models, the natural dependency on credit decreases. Slower credit growth is expected to become the norm in the future.

Business Model Evolution: Deepening the Competitive Moat

The transformation of economic drivers is forcing the banking industry to abandon its old development path and enter a "gear-shifting" period in its operational model.

"The banking industry is entering an era of low loan-to-deposit ratios," noted Wang Jian, an analyst with the financial research team at Guosen Securities Economic Research Institute. He pointed out that the way forward for banks is not narrow but rather consists of multiple new paths coexisting. The core challenge lies in whether banks' current mainstream professional capabilities can truly navigate these paths successfully.

Drawing on domestic and international experience, he proposed three viable directions: deepening credit potential, making sound investment layouts in markets like bonds, and actively exploring intermediary business.

These are precisely the three main battlegrounds where the banking industry is currently focusing its efforts, and they are also key points for building a business "moat" under the new circumstances. In terms of client-side strategy, banks are gradually shifting from "he who wins retail wins the world" to "the bank that understands tech companies better."

An increasing number of banks are striving to provide corporate clients with full-lifecycle financial services covering "from inception to listing, from startup to growth." This ranges from initial account opening and settlement, to precise connections within upstream and downstream industry chains, to the customized design of innovative credit models, and even support from group financial institutions like AIC companies (Financial Asset Investment Companies) and bank wealth management subsidiaries, offering diversified financial support including equity investments, warrants, and IPO investments. Currently, banks are attempting to lock in future quality assets through "one-stop" services.

"A bank's long-term, deep cultivation of technology enterprise client groups will build a new development moat," pointed out a source from a bank wealth management subsidiary. This strategic layout will not only drive comprehensive cooperation across on- and off-balance-sheet businesses like fund custody, M&A loans, and bank acceptance issuance and discounting but will also provide a richer source of quality assets for the bank's wealth management side, forming a virtuous cycle of "corporate banking empowering wealth management, and wealth management feeding back into corporate banking."

No Longer 'Waiting for the Wind': Urgent Market Value Management Takes Center Stage

Despite improving earnings and shifting growth drivers, this has not changed the situation where all 42 A-share listed banks are trading below their book value. Wind data shows that as of July 9th, Bank of Ningbo and Bank of Chengdu had the highest price-to-book ratios at 0.88 times. China Merchants Bank ranked third with a P/B ratio of 0.85 times.

Faced with persistently declining share prices, banks are no longer "waiting for the wind to come." From urgently establishing market value management teams to actual controllers and senior management personally investing to increase their holdings, a top-down "share price defense campaign" is quietly underway in the banking industry.

At the recent flurry of bank shareholder meetings, how to increase shareholder returns became a focal point during the Q&A sessions.

"There is currently a gap between the share price performance and shareholder expectations," said Peng Jiawen, Vice President of China Merchants Bank, opening the discussion on market value at the bank's shareholder meeting on June 25th. He stated that CMB has established a market value management team with himself as the head. The team's responsibility is not limited to monitoring share price fluctuations but involves deep analysis of market logic and shareholder demands, translating these findings into operational improvements and optimization of dividend policies.

CMB is not alone. Since the start of 2026, joint-stock banks like China CITIC Bank and China Zheshang Bank have also made their stances clear. China CITIC Bank disclosed the setup of its market value management team during its earnings conference, while China Zheshang Bank incorporated market value management methods into its annual action plan, providing institutional support for share price stability.

The actions of city commercial banks and rural commercial banks are more direct. According to incomplete statistics, institutions including Bank of Changshu, Bank of Chengdu, Bank of Suzhou, Ruifeng Rural Commercial Bank, Bank of Beijing, Chongqing Rural Commercial Bank, and Bank of Jiangyin have all seen intensive share purchases by major shareholders or senior management this year, conveying confidence to the market through real monetary investment.

Among them, Bank of Changshu's share purchase efforts have been particularly notable. In July, the bank issued two announcements: two local state-owned shareholders collectively increased their holdings by over 30 million shares within a month. Simultaneously, the management team, led by President Lu Dingchang and Vice President Zhang Kangde, cumulatively purchased 550,000 shares during a six-month share purchase period, with a total investment of nearly 3.88 million yuan.

All Stocks Below Book Value: Is It Time to Invest in Bank Shares?

As voices suggesting the banking sector is undervalued resurface in the market, can investor capital return? In fact, bank stocks are not suitable for short-term speculation but are more appropriate for medium- to long-term allocation.

Yang Delong stated that bank stocks possess the characteristic of high dividends, which still holds a certain appeal for investors seeking long-term stable returns. From a current valuation perspective, bank stocks still have room for appreciation.

If the investment horizon for bank stocks is extended, investment returns remain considerable. According to Wind data, from 2023 to July 6, 2026, Agricultural Bank of China, Bank of China, China Construction Bank, and Chongqing Rural Commercial Bank saw gains exceeding 100%. Industrial and Commercial Bank of China, Bank of Shanghai, Bank of Qingdao, and Bank of Jiangsu also achieved gains of over 90%.

Looking ahead to the second half of the year, Zheshang Securities believes that bank stocks are entering a golden allocation window where the probability of success and potential returns resonate. Against the long-term macro backdrop of low interest rates and an asset shortage, bank stocks possess both "bond-like attributes" and serve as a "positive option on economic recovery," making them a scarce asset worthy of focused attention.

"In the second half of the year, the banking sector's profit resilience will become prominent, and overall performance may exceed market expectations," Guosheng Securities also noted. They believe the current investment focus in the banking sector centers on the valuation repair theme driven by the recovery of core revenue growth. The banking sector possesses strong certainty in profit recovery and high dividend attributes, further highlighting its defensive and offensive configuration value.

Furthermore, Dai Zhifeng, Director of the Zhongtai Securities Research Institute, stated that from a full-year perspective, the certainty of bank earnings will bring steady returns for bank stocks in 2026, but short-term bank stock movements are related to market style. In the second half of the year, investors can focus on the dividend season and valuation rotation within the banking sector. He further suggested that investors could focus on large and medium-sized banks with high, stable dividends, as well as city and rural commercial banks with regional advantages and strong certainty.