Citigroup's latest research report indicates that the 21 Chinese banks it covers delivered a stronger-than-expected 9.9% year-on-year growth in pre-provision operating profit during the first half of the year. This performance was driven by robust trading gains, resilient loan growth, and stabilizing net interest margins. Although first-half earnings growth was slower, with a year-on-year increase of just 3.2% due to higher credit costs from conservative provisioning and elevated effective tax rates, second-quarter earnings growth actually accelerated to 3.3% year-on-year, up from 3% in the first quarter.

BANK OF CHINA (03988), CCB (00939), and PSBC (01658), along with Bank of Ningbo, all posted first-half results that exceeded expectations, while MINSHENG BANK (01988) and Industrial Bank were among those that disappointed. The report also highlights that major state-owned banks and Bank of Ningbo surpassed market expectations with their interim dividend payout ratio increases. Among H-share banks, Citigroup's top picks are BANK OF CHINA and CCB.

The report notes that China's six largest banks raised their payout ratios by one percentage point to 31% for the first half of 2026, up from 30% in the 2025 fiscal year—a positive surprise for the market. This increase reflects several factors: the Ministry of Finance's growing demand for dividend payments from large banks; regulatory encouragement for A-share listed companies to boost shareholder returns through buybacks and dividends; and a shift away from the previous key constraint, which had been ensuring sufficient buffers against potential credit cycles. However, systemic asset quality risks are increasingly less of a concern, and Chinese banks now hold ample provisions for credit cycles.

Looking ahead, with a sustainable return on equity of around 8% and sustainable loan growth of roughly 5%, Citigroup expects Chinese major banks to gradually raise their dividend payout ratios to approximately 40%. As Chinese banks approach the ~40% payout level seen among global banking peers, H-share Chinese banks should warrant re-rating. Given that H-share Chinese banks currently trade at 0.6 times 2026 estimated price-to-book ratio with a dividend yield of around 5%, this translates into a total capital return potential of about 25%.

Additionally, the bank anticipates continued fund inflows into Chinese bank stocks, supported by: the downtrend in 10-year government bond yields, which widens the spread between bank dividend yields and bond yields, making bank shares more attractive to southbound yield-seeking investors; new asset-liability management regulations for insurers that should encourage onshore insurance companies to increase allocations to income-generating assets like Chinese banks; and, given that Chinese banks are among the few sectors showing strong negative correlation with AI tech stocks, China and emerging market funds will continue accumulating bank shares to hedge against downside risks in the event of a tech-AI sector correction.