On July 29, shares of China Construction Bank Corp (CCB) rose to an intraday high of 10.73 yuan, marking a new record high. Just one day after breaking its previous record, the stock climbed even further. On the same day, China Merchants Bank Co Ltd (CMB) closed at 39.66 yuan, pushing its market capitalization back above the 1 trillion yuan mark. Honestly, seeing such a rally in bank stocks triggered curiosity rather than excitement. In the first half of the year, the banking sector was still declining, with total market capitalization briefly losing nearly 1.5 trillion yuan. So, what changed?
After reviewing the data, several key factors emerged. First, looking at fund flows, net outflows from broad-based index funds tracking benchmarks like the CSI 300 reached nearly 1 trillion yuan in the first half of 2026, putting significant redemption pressure on bank stocks. Additionally, active public funds reduced their holdings in bank stocks to their lowest level since 2019. In the second quarter, the weight of bank stocks in fund portfolios was just 1.26%, an 8-percentage-point underweight relative to the benchmark index. Simply put, most investors who wanted to sell had already sold. By July, the deleveraging pressure from broad-based funds was largely cleared. With selling pressure easing, even modest buying power pushed prices higher. In July alone, the total market capitalization of the banking sector recovered by over 1.4 trillion yuan.
Continued operational improvement
On the fundamentals side, several numbers are noteworthy. In the first quarter of 2026, the net interest margin (NIM) for commercial banks fell to 1.40%, a historic low. At first glance, this looks concerning. However, the pace of decline is slowing. In the same period last year, the NIM dropped 9 basis points year-over-year, but this year, it fell only 2 basis points. Some banks have already delivered strong results. Bank of Chongqing Co Ltd reported first-half revenue of 8.486 billion yuan, up 10.8% year-over-year, with net profit attributable to shareholders rising 10.28% to 3.518 billion yuan—both double-digit growth. Chongqing Rural Commercial Bank Co Ltd also performed well, with revenue of 15.892 billion yuan, up 7.81%, and net profit of 8.168 billion yuan, up 6.09%. An analyst from a research firm made a compelling point: the banking industry has passed its trough, with revenue elasticity this year significantly improved compared to the past three years. Net interest income is likely to move beyond a state of "volume growth without profit increase." This assessment seems reasonable. While a V-shaped recovery in NIM is unlikely, narrowing declines and stabilizing income are tangible improvements for bank profits.
What a 5% dividend yield means in the current environment
Turning to valuation and dividends, the banking sector currently trades at an average price-to-book (PB) ratio of about 0.58 times, still below book value. However, the average dividend yield stands at around 4.45%, with some large-cap stocks yielding over 5%. To put that in perspective, the average annualized return on bank wealth management products is currently below 2%, while the listed rate for three-year time deposits is just 1.25%. For dividends alone, bank stocks offer three to four times the return of deposits. Another detail: on July 24, China Construction Bank issued 60 billion yuan in 10-year Tier-2 capital bonds at a coupon rate of just 1.88%. The market's willingness to lend to CCB at rates below 2% signals strong confidence in the bank's liability management. With funding costs declining, there is a solid foundation for stabilizing the NIM.
Low institutional holdings create upside potential
To put it bluntly, perhaps the biggest positive for bank stocks right now is the extremely low level of institutional holdings. Fund holdings in the second quarter were at 1.26%, 8 percentage points below the benchmark index. This means that if market style continues to rebalance or risk appetite further declines, there is significant room for incremental capital to flow in. Some institutional views suggest that even without a dramatic shift in market style, the absolute return direction for a gradual valuation recovery in bank stocks is relatively clear. In other words, investors don't need to wait for a major rally; simply benefiting from valuation recovery can offer gains.
How to participate
For those looking to capture the overall opportunity in the banking sector, the Bank ETF Huaxia (515020) is a convenient option. It tracks the CSI Bank Index, offering a diversified basket of 42 A-share listed banks, covering both large and small institutions, without betting on a single stock. Of course, investing in bank stocks shouldn't be approached with the same mindset as tech stocks. Bank earnings won't suddenly explode with rapid growth. However, for a long-term allocation focused on dividends, the current price level offers compelling value. After all, a 5% dividend yield combined with a 0.58 PB ratio is a bargain in today's market environment. The MACD golden cross signal has formed, suggesting these stocks are gaining momentum!