CGS International
Date of Report: September 11, 2025
China Banks Set for Rebound: Southbound Flows, Dividend Upside, and ESG in Focus
Executive Summary: Sector Outlook and Key Drivers
The Hong Kong-listed China banking sector is experiencing a pivotal moment. Net Southbound buy inflows into China banks in early September have already outpaced the weak August and are on track to surpass July. This is significant, as there is a strong 73% correlation between the sector’s outperformance and monthly net Southbound buy inflows. A dividend yield spread framework points to a potential 17-27% share price upside for China banks. CGS International reiterates its Overweight rating on the sector, citing improving operating trends and attractive valuation spreads as core tailwinds. Top picks: China Merchants Bank (CMB), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC), and Chongqing Rural Commercial Bank (CQRCB).
Southbound Flows: A Double-Edged Sword
– Southbound net buy flows under the Stock Connect programme into China banks slowed sharply in July and August 2025, sparking investor concern after the MSCI China Banks Index underperformed the MSCI China Index by 21 percentage points over two months. – The slowdown was attributed to a rotation of Southbound investor preference towards insurers, with Ping An—a major Southbound player—increasing its insurer holdings. – Encouragingly, September’s month-to-date net inflows have already exceeded August’s total, with the run-rate set to beat July’s as well. – The return of Southbound flows is critical: historically, a 73% correlation exists between monthly net Southbound inflows and relative outperformance of the China Banks Index.
China Bank Sector: Valuation and Performance Snapshot
| Ticker |
Name |
Rating |
Price (Lcy) |
Target Price (Lcy) |
Upside/Downside |
FY25F P/E |
FY25F P/BV |
FY25F Div Yield |
| 1398 HK |
ICBC |
Add |
6.00 |
7.20 |
20% |
5.5 |
0.50 |
5.7% |
| 0939 HK |
CCB |
Add |
7.97 |
11.40 |
43% |
5.6 |
0.54 |
5.4% |
| 3988 HK |
BOC |
Add |
4.46 |
5.00 |
12% |
5.7 |
0.47 |
5.6% |
| 1288 HK |
ABC |
Add |
5.63 |
7.40 |
31% |
6.6 |
0.64 |
4.9% |
| 3328 HK |
BOCOM |
Reduce |
6.94 |
4.20 |
-39% |
5.9 |
0.48 |
5.1% |
| 3968 HK |
CMB |
Add |
48.92 |
53.00 |
8% |
7.6 |
0.97 |
4.6% |
| 1988 HK |
MSB |
Reduce |
4.29 |
1.90 |
-56% |
6.1 |
0.30 |
4.9% |
| 3618 HK |
CQRCB |
Add |
6.25 |
7.50 |
20% |
5.6 |
0.48 |
5.5% |
In-Depth Company Highlights
China Construction Bank (CCB)
– Attractive FY25F P/E of 5.6x, among the lowest of the big four banks. – FY25F dividend yield of 5.4%. – Large H-share free float makes it a favorite among Southbound investors. – Target price: HK\$11.40 versus HK\$7.97 recent close, implying a 43% upside.
China Merchants Bank (CMB)
– Known for high-quality management and a robust track record of shareholder value creation. – Optimism surrounds a potential rise in its dividend payout ratio in FY26F-27F. – FY25F P/E of 7.6x, FY25F dividend yield of 4.6%. – Target price: HK\$53.00 vs. HK\$48.92 close (8% upside).
Industrial and Commercial Bank of China (ICBC)
– The lowest FY25F P/E among the big four (5.5x), tied with CCB. – Highest dividend yield among the big four for FY25F at 5.7%. – Target price: HK\$7.20 vs. HK\$6.00 close (20% upside).
Chongqing Rural Commercial Bank (CQRCB)
– FY25F P/E: 5.6x; FY25F dividend yield: 5.5%. – Target price: HK\$7.50 vs. HK\$6.25 close (20% upside).
Dividend Yield Spreads: Foundation for Price Upside
– The average 12-month forward dividend yield for China banks stands at 5.58%, while China’s 1-year and 10-year government bond yields are at 1.39% and 1.80%, respectively. – The current dividend yield spread over the 1-year treasury is at 4.2%, and over the 10-year at 3.8%, both above historical averages (3.4% and 2.6%). – If yield spreads revert to historical means, CGS International estimates a 17% to 27% share price upside for China banks.
Dividend Yield Spread Table
| Metric |
Current |
Historical Average |
Implied Share Price Upside |
| Dividend Yield (12m fwd) |
5.58% |
— |
— |
| 1-yr Treasury Yield |
1.39% |
— |
— |
| 10-yr Treasury Yield |
1.80% |
— |
— |
| Spread vs. 1-yr Treasury |
4.2% |
3.4% |
17% |
| Spread vs. 10-yr Treasury |
3.8% |
2.6% |
27% |
Operating Trends: Profitability Rebounds
– Pre-provisioning operating profit (PPOP) for covered banks rose 4.5% YoY in 2Q25, the strongest in 15 quarters. – Adjusted PPOP, which strips out net trading income, returned to YoY growth for the first time since 3Q22. – PPOP trends are improving for both big four and mid-sized banks, reducing pressure on profitability buffers.
Key PPOP Growth Table
| Bank |
2Q25 PPOP Growth YoY |
1Q25 PPOP Growth YoY |
FY24 PPOP Growth YoY |
| ICBC |
7.4% |
-3.9% |
3% |
| CCB |
14.4% |
-5.8% |
2% |
| BOC |
1.7% |
-1.4% |
-6% |
| ABC |
0.0% |
-0.3% |
4% |
| CMB |
-1.2% |
-4.2% |
3% |
Southbound Investor Mix and Rotation Trends
– A marked rotation was seen in Q3 2025, with Southbound investors shifting inflows away from banks and towards insurers. – Ping An Asset Management, a key player, significantly increased stake filings in H-share insurers and banks, with 49 substantial shareholding notices in 2025 YTD. – Despite the rotation, the mix of Southbound holdings in major banks like ICBC, CCB, BOC, ABC, and CMB remains high, with ICBC consistently above 37% of H-shares held by Southbound investors.
ESG: Progress and Challenges
– China banks are assessed to have medium ESG risk, with LSEG combined ESG scores ranging from B to C in 2023. – Social score strengths are offset by weaker governance scores, reflecting the dominant state ownership. – Major ESG developments: – Banks are rolling out more green finance products to align with China’s carbon neutrality (2060) and peak emissions (2030) goals. – The People’s Bank of China (PBOC) is enforcing mandatory climate disclosure and assessment plans. – However, recent policy directives to increase lending to coal and energy sectors have presented temporary ESG score headwinds. – China Construction Bank (CCB) stands out as a top ESG pick, with an LSEG combined ESG score of B-.
Key Risks
– Sector rotation: “Risk-on” investors may reduce allocations to banks in favor of other financial sectors. – Policy uncertainty: Potential for policy risks to exceed expectations. – ESG risk: Inconsistent progress in green lending and governance could impact sentiment and valuations.
Conclusion: Sector Overweight, Upside Remains
CGS International reiterates its Overweight call on China banks, driven by: – Easing pressures on pre-provisioning operating profit – Attractive dividend yield spreads versus treasuries – Rebounding Southbound flows – Improving sectoral fundamentals and ESG progress
Top picks for investors: China Merchants Bank, China Construction Bank, ICBC, and CQRCB. The sector is primed for a rebound, with 17-27% upside potential as yield spreads mean-revert and Southbound inflows recover.
| Stock Rating |
Definition |
| Add |
Expected total return to exceed 10% over the next 12 months |
| Hold |
Expected total return between 0% and +10% over the next 12 months |
| Reduce |
Expected total return below 0% |
Contact Analysts
– Michael Chang, CFA, T (852) 2539 1323, E [email protected] – Laura Li Zhiyi, T (852) 2532 1127, E [email protected]
This comprehensive analysis should guide investors, analysts, and market watchers in understanding the current positioning and outlook of the China banking sector, with a clear focus on Southbound flows, valuation upside, company specifics, and ESG trends.
