CITIC SEC: Banks to Enter Fundamental Improvement Channel in the Second Half of the Year, Industry Valuation Expected to Increase

CITIC SEC released a research report stating that the May financial data showed that the current real entity financing demand was relatively weak, and the ample funds in the financial system helped the performance of financial assets. Since 2026, there has been a large net redemption of broad-based ETFs, leading to continued net selling in the banking sector. As of June 12, the 18 key broad-based ETFs related to the banking sector held around 50 billion yuan in bank stocks, a decrease of over 70% from the end of 2025. The impact of ETF net redemptions on the banking sector has peaked, and the subsequent impact is relatively limited. Looking ahead to the second half of the year, as banks enter the path of fundamental restoration, industry valuations are expected to rise, and the continued attractive dividend yield to low-risk capital makes it possible to anticipate stronger absolute return opportunities. On June 12, 2026, the central bank released the financial data for May 2026, showing that by the end of May, the stock of social financing increased by 7.7% year-on-year (7.8% the previous month), with total new social financing in May amounting to 2.03 trillion yuan, 260 billion yuan less than the same period last year; new loans increased by 520 billion yuan, 100 billion yuan less than the previous year. Key points from CITIC SEC are as follows: Financial data: weak real demand, ample funds in the financial system. In May, new social financing amounted to 2.03 trillion yuan, 260 billion yuan less than the previous year, with a year-on-year growth rate of 7.7%. 1) Government bonds imply that there is still room for fiscal stimulus, with net financing of government bonds in May totaling 1.22 trillion yuan, 238.5 billion yuan less than the previous year, mainly due to a high base formed by the concentrated issuance of exchangeable bonds and special national bonds in the same period last year. 2) Corporate credit demand is weak, with short-term, medium- and long-term loans, and bill financing in May decreasing by 10 billion yuan/350 billion yuan/482.4 billion yuan respectively compared to the previous year. While bill financing continues to grow rapidly, the year-on-year decrease in medium and long-term loans to enterprises reflects a cautious attitude towards capital spending by companies, as well as policies encouraging direct financing and the shift of high-quality companies towards bond issuance. 3) Residential credit implies that the household balance sheet is still improving, with short-term and medium- to long-term loans to residents decreasing by 63.2 billion yuan and 131.7 billion yuan respectively compared to the previous year. On the one hand, the willingness of residents to finance consumption remains weak, while income expectations are awaiting improvement; on the other hand, although there are signs of stabilization in high-tier city real estate transactions, overall real estate sales and mortgage lending remain weak, and there is an impact from residents repaying their debts early. The stock price trend of the banking sector has been greatly affected by the capital market since 2026. Analyzing two important capital market clues affecting bank stock prices: 1) At the individual stock level, since 2026, sovereign wealth funds have significantly reduced their holdings in some shareholding banks and regional banks, while China Investment Corporation (CIC) and the State Administration of Foreign Exchange (SAFE) continue to demonstrate a characteristic of long-term stable holdings: as of the end of Q1 2026, China Investment Corporation's holdings in Shanghai Pudong Development Bank, CITIC Bank, and Ping An Bank have decreased, and they are no longer among the top ten shareholders of China Everbright Bank, Industrial Bank, China Merchants Bank, Bank of Beijing, and Hua Xia Bank, with a reduction of at least 14% to 67%. In comparison, CIC and SAFE's individual stock holdings have remained stable. 2) At the ETF level, since 2026, there has been a large net redemption of key broad-based ETFs, leading to continued net selling in the banking sector. Broad-based ETFs have shown continued net redemptions this year, with 23 key broad-based ETFs totaling 1.42 trillion yuan in net redemptions as of the end of May. Further analysis of the "large and unconventional" net subscription and redemption exceeding 10 billion yuan of these key broad-based ETFs shows a significant correlation with the trend of banking indices. The peak of selling has passed, and the value of allocation is evident. As of the end of May 2026, the 18 key broad-based ETFs related to the banking sector held only 49.865 billion yuan in bank stocks, a decrease of over 130 billion yuan from the end of 2025, a decrease of over 70%. The impact of ETF net redemptions on the banking sector has peaked, and the subsequent impact is relatively limited. Since June, as the broader market falls from its highs, these key broad-based ETFs related to the banking sector have remained stable in size, with total bank stock holdings amounting to 503.1 billion yuan as of June 12, a slight increase from the end of May. With the declining impact of ETF selling combined with heightened volatility in the technology sector, the banking sector's performance has significantly improved. From June to June 12, 2026, the CITIC BANK Index (CI005021.WI) rose by 5.14%, outperforming the performance of the SSE 50, CSI 300, CSI 1000, and the STAR 50 indices, which declined by -1.04%/-2.35%/-2.45%/-5.03% respectively, with the banking index outperforming by 6.18/7.49/7.59/10.17 percentage points. It presents both absolute and relative return value. At the same time, as of June 12, 2026, the average static dividend yield of the sector is around 4.3%, with some large-cap targets having a dividend yield of over 5%, and the average static PB is 0.60x, still in a high-value range. Risk factors: Significant decline in macroeconomic growth; deterioration in banking asset quality beyond expectations; unexpected changes in regulation and industry policies; slower than expected strategic progress of companies.