Broker: CGS International
Date of Report: September 11, 2025

China Banks Poised for Upside: Southbound Flows, Dividend Yields, and ESG Drive Sector Resurgence

Executive Summary: Double-Edged Sword of Southbound Flows

The Hong Kong-listed China banking sector is experiencing a pivotal moment as Southbound net buy inflows rebound sharply in September 2025, following an exceptionally weak July and August. With a robust 73% correlation between Southbound net flows and banks’ outperformance versus the broader MSCI China Index, the sector’s trajectory is once again in sharp focus for investors.
CGS International maintains its Overweight sector rating, citing improving operating profitability and compelling dividend yield spreads over government bonds. The broker’s top picks—China Merchants Bank (CMB), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC), and Chongqing Rural Commercial Bank (CQRCB)—are highlighted for their attractive valuations and dividend prospects.

Southbound Flows: The Key to Performance Divergence

July and August saw the MSCI China Banks Index underperform the MSCI China Index by 21 percentage points, largely attributable to a significant slowdown in monthly Southbound net buy flows through the Stock Connect program. August’s net buy flows into China banks were the lowest since September 2024, as investors shifted preference to insurers, led by Ping An’s high-frequency purchases in the space.
However, September has brought a reversal. By September 10, Southbound buy inflows into the banks had already surpassed August levels and were on track to exceed those of July. The return of these flows is critical: historical data shows a 73% correlation between net Southbound buys and bank sector outperformance.

Valuation Framework: Dividend Yield Spreads Signal 17–27% Upside

A key valuation anchor for the sector is the spread between bank dividend yields and China’s 1-year and 10-year government bond yields. As of September 2025:

• The current 12-month forward dividend yield for the sector stands at 5.58%.
• Dividend yield spreads over 1-year and 10-year bonds are 4.2% and 3.8%, respectively—both well above historical averages.
• This suggests share price upside of 17%–27% for the sector as dividend yield spreads revert to long-term means.

Financial Table: China Banks – Valuation Metrics at a Glance

Company Insights: In-Depth Analysis of Key China Banks

China Construction Bank (CCB)

• Rating: ADD | Target Price: HK\$11.40 | Current Price: HK\$7.97
• Valuation: FY25F P/E of 5.6x—among the lowest in the sector
• Dividend Yield: 5.4% for FY25F
• ROE: 9.9%
• Key Strengths: Large H-share free float, attractive to Southbound investors
• ESG Highlight: LSEG assigned a combined ESG score of B- in 2023, among the highest for China banks; strong focus on green finance initiatives

China Merchants Bank (CMB)

• Rating: ADD | Target Price: HK\$53.00 | Current Price: HK\$48.92
• Valuation: FY25F P/E of 7.6x
• Dividend Yield: 4.6% for FY25F
• ROE: 13.3%—highest among major banks
• Key Strengths: High-quality management, strong track record, potential rise in dividend payout over FY26F–27F

Industrial and Commercial Bank of China (ICBC)

• Rating: ADD | Target Price: HK\$7.20 | Current Price: HK\$6.00
• Valuation: FY25F P/E of 5.5x (lowest in peer group, tied with CCB)
• Dividend Yield: 5.7% for FY25F (highest in the big four)
• ROE: 9.3%
• Key Strengths: Attractive to Southbound investors for both valuation and yield

Chongqing Rural Commercial Bank (CQRCB)

• Rating: ADD | Target Price: HK\$7.50 | Current Price: HK\$6.25
• Valuation: FY25F P/E of 5.6x
• Dividend Yield: 5.5% for FY25F
• ROE: 8.6%

Other Notable Banks Covered

• Bank of China (BOC): ADD, 5.7x P/E, 5.6% yield, 8.8% ROE
• Agricultural Bank of China (ABC): ADD, 6.6x P/E, 4.9% yield, 10.1% ROE
• Bank of Communications (BOCOM): REDUCE, -39% downside, 5.9x P/E, 5.1% yield
• China Minsheng Bank (MSB): REDUCE, -56% downside, 6.1x P/E, 4.9% yield

Sector Performance and Southbound Investor Behavior

• MSCI China Banks Index underperformed the MSCI China Index by 20% points in July–August 2025.
• Despite underperformance mid-year, the 2025 YTD gain for the banks index stands at 19%, following a 37% rise in 2024—the best since 2009.
• Ping An Asset Management’s active trading in H-share banks, insurers, and telecoms has been a major driver of sector flows, with 49 substantial shareholding notices filed YTD.

Ping An’s Portfolio Rotation: Impact on Bank and Insurer Flows

Ping An Asset Management, a pivotal Southbound investor, shifted heavy net purchases from banks to insurers during August, affecting sector flows. Its HK-listed portfolio is 93% banks, 6% insurers, and 1% telecom, with total substantial HK shareholdings valued at US\$56.2bn for banks and US\$3.4bn for insurers.

Pre-Provisioning Operating Profit (PPOP): Signs of Recovery

Bank sector operating metrics have improved notably:

• 2Q25 PPOP growth year-on-year reached 4.5%—the strongest in 15 quarters.
• Adjusted PPOP (excluding trading income) returned to growth for the first time since 3Q22.
• Mid-sized banks saw especially robust PPOP growth in 2Q25, with MSB and other names showing double-digit increases.

ESG: Green Finance and Governance Under the Spotlight

• China banks are assessed as having medium ESG risk, with combined LSEG scores of B to C in 2023.
• Relative strength is observed in Social factors, offset by weaker Governance (attributable to state ownership).
• China Construction Bank stands out as a top ESG performer with a B- score.
• Green finance initiatives are accelerating, with mandatory climate-related disclosures and incentives for green lending now in place.
• Nevertheless, policy-driven lending to coal and energy sectors can temporarily weigh on environmental scores.

Key Risks and Sector Outlook

• The main downside risks are sector rotation by risk-on investors and adverse policy developments.
• However, with PPOP trends improving and dividend yield spreads at historically attractive levels, the sector remains well positioned for recovery as Southbound flows normalize.
• CGS International reiterates its Overweight rating for the China bank sector.

Investment Rating Framework

• Add: Total return expected to exceed 10% over 12 months
• Hold: Total return expected between 0% and +10%
• Reduce: Total return expected to fall below 0%

Conclusion: Structural Tailwinds and Tactical Opportunity

The China banking sector offers a compelling combination of value, yield, and operating improvement, underpinned by the return of Southbound capital and robust dividend spreads over government bonds. With top picks like CCB, CMB, ICBC, and CQRCB, investors have clear opportunities for both income and capital appreciation, supported by sector-wide efforts to address ESG priorities and green finance. The risk-reward profile remains attractive for long-term and tactical investors alike.