PB returns to "1", a question that all bank stocks must answer
Author | Wang Hanyu
Editor | Zhang Fan
Recently, Agricultural Bank of China (ABC), which has experienced a "14 - consecutive - positive - day" streak, has regained the title of the "world's largest bank".
From September 25th to October 22nd, the A - share price of ABC has risen for 14 consecutive trading days. Although it declined on October 23rd, its total market value still reached approximately 2.72 trillion yuan, surpassing Industrial and Commercial Bank of China (ICBC) again. Meanwhile, its H - share price hit a new high, reaching HK$5.97 per share at one point on October 23rd.
ABC's A - shares had a "14 - consecutive - positive - day" streak. Source: Wind
Along with this process, the price - to - book ratio of ABC's A - shares finally exceeded 1. This not only drove up the main bank index, but also reopened the channel for its equity refinancing.
ABC ranks among the top 5 constituent stocks of the CSI Bank Index, with a weight ratio of approximately 6.86%. Source: Wind
On the other hand, this also broke the long - standing deadlock of state - owned large - scale banks trading below book value.
Although the price - to - book ratios of A - shares of ICBC, China Construction Bank, Bank of China and other banks are still around 0.7, their valuations have significantly improved in the past two years.
The CSI Bank Index has risen by 39% in the past two years. After starting a correction in July this year, it returned to the upward range after the "Golden Week" holiday, and the total market value of the current sector has exceeded 10 trillion yuan.
The trend of the CSI Bank Index in the past two years. Source: Wind
This shows that compared with the time earlier this year when ABC's total market value exceeded that of ICBC for the first time, its price - to - book ratio exceeding 1 may be more of a signal - indicating that more state - owned large - scale banks are expected to follow this trend and pull their price - to - book ratios back above 1, and then their financing capabilities will be further restored.
Trading below book value restricts the financing ability of bank stocks
A price - to - book ratio of bank stocks below 1 means that the capital market has priced the bank lower than its book net assets calculated according to accounting standards, and it also reflects that investors believe that its future profitability and return on assets may not be sufficient to support its book value.
In other words, this reflects the market's lack of confidence in the future profitability and asset quality of this bank or the entire banking industry.
This undervaluation state does not stop at the market sentiment level. It will be directly transmitted to the business level, restricting the core function of banks - financing ability, and then affecting their effectiveness in serving the real economy.
One of the most effective market - oriented ways for banks to replenish core tier - one capital is equity refinancing, such as public offerings and private placements of new shares.
Usually, the pricing of new share offerings needs to refer to the market price and then give a certain discount. At this time, if a bank's price - to - book ratio continues to be below 1, it will inevitably lead to the offering price being lower than the net assets per share. This means that new shareholders can obtain shares at a price lower than the "book cost", diluting the net assets per share. And the interests of existing shareholders will be damaged, and they will probably oppose the offering plan.
In this way, bank stocks trading below book value is equivalent to basically closing the channel for equity financing. And for state - owned banks, issuing new shares at a price lower than the net assets per share will also make them face doubts about the loss of state - owned assets.
In addition, for debt financing, such as issuing financial bonds, although this behavior mainly depends on the bank's credit rating, continuous low valuation will still affect the assessment of credit risk.
The long - term low price - to - book ratio is a visible indicator of the market's concern about the bank's credit risk. This concern will be transmitted to the bond market, causing banks to pay higher interest rates to attract investors when issuing financing tools such as secondary capital bonds and perpetual bonds, thus pushing up their financing costs.
Especially under the current very narrow net interest margin, the increase in liability costs will further compress bank profits.
Now, ABC's valuation has been restored to above its net assets, removing the main obstacle for its future equity refinancing and reopening the channel for equity financing. ABC can use this opportunity to improve the leverage structure formed by relying on issuing capital bonds to replenish capital in the past and reduce the pressure of interest payments.
This is not only expected to improve ABC's profit level, but also the more abundant and healthier - structured capital will enhance the bank's credit - lending ability and risk - resistance ability, thus promoting the improvement of ABC's valuation again.
Why is ABC the first to exceed 1?
Considering the current environment, ABC's price - to - book ratio exceeding 1 for the first time is the result of the combined effect of its own stable performance and the fact that the entire banking industry benefits from the market's investment style preference for high - dividend assets.
In the first half of 2025, ABC achieved an operating income of 369.937 billion yuan, a year - on - year increase of 0.85%; the net profit attributable to the parent company's shareholders was 139.51 billion yuan, a year - on - year increase of 2.66%, making it the only one among the four major state - owned banks with positive growth in net profit attributable to the parent company.
Although the growth rates of operating income and profit are moderate, in the face of the spread pressure commonly faced by the industry, the stable performance shows its outstanding cost - control and risk - resistance abilities.
Looking at the entire banking industry, the asset quality is becoming more stable, and the provision coverage ratio is at a relatively high level in history, providing a thicker safety cushion for net assets. This can alleviate the market's concerns about the asset quality of banks to a certain extent.
Wind's profit forecast shows that the net profit attributable to the parent company of the CSI Bank will return to the positive growth range from 2025 to 2027.
Profit forecast of the CSI Bank. Picture and data source: Wind
At the same time, there are still uncertain factors at present. The return on investment in many fields has declined, and the risk - free interest rates such as the national debt yield have continued to decline. This has significantly increased the attractiveness of bank stocks with high dividend yields and relatively low volatility, especially state - owned large - scale banks, to long - term funds such as insurance funds and social security funds that pursue stable cash flows.
Xiangcai Securities pointed out that with the re - balancing of the market investment style, the stable and high - dividend bank stocks will attract the inflow of allocation - type funds, and it is optimistic about the absolute return investment value of bank stocks.
Looking forward, it is expected that with the decline in deposit costs and the narrowing of the spread decline, as well as the steady growth of intermediate business income, the performance of the banking industry is expected to remain stable. The institution suggests paying attention to the stable and high - dividend allocation value of state - owned large - scale banks, as well as the valuation restoration opportunities of joint - stock banks and regional banks under the expectation of economic improvement.
Can the "comparison effect" drive the spread of valuation restoration?
For individual bank stocks, a price - to - book ratio above 1 can enhance the financing advantage and improve the profit level; for the real economy, it can enable the banking system to better play its service effectiveness.
In the modern economic operation, banks are often compared to the "blood vessels". They absorb idle social funds through functions such as deposit taking and bond issuance, and provide liquidity support for the market through tools such as credit and bill discounting. If there is a lack of sufficient capital due to low valuation and poor financing, banks will not be able to expand the credit scale and further serve the real economy.
From this perspective, ABC breaking the long - standing situation of bank stocks trading below book value is also in line with the policy orientation of the regulatory authorities to continuously guide banking financial institutions to optimize credit allocation.
Therefore, ABC's price - to - book ratio exceeding 1 is not only an inflection point for its individual valuation, but may also provide confidence support for the overall valuation restoration of bank stocks.
In the past few years, the concept of "China - Special Valuation" has been mentioned many times. The regulatory authorities have guided funds to pay attention to state - owned listed companies with stable operations, high dividends and low valuations. ABC's valuation restoration may make the market notice that the undervalued value elements of the banking system, such as stable operations, high dividend payout ratios and the core position in the economic operation, are getting reasonable prices.
Then, can this change also prompt the market to re - examine other banks trading below book value? In other words, if the business attributes and asset quality are similar, can the "comparison effect" also drive funds to spread from the restored leading banks to their peers with more attractive valuations?
Some institutions are positive about this. Morgan Stanley believes that the upcoming dividend payments in the fourth quarter, the stabilization of interest rates, the support of 500 billion yuan in structural financial policy tools, and a more sustainable policy path will all support the re - valuation of Chinese banking stocks.
CITIC Securities also believes that the mid - term dividends of banks have continued to expand to 17 banks and are being implemented one after another. Bank stocks have both relative and absolute returns. It is expected that the third - quarter reports of banks will continue the stable pattern, the spread trend is positive, the non - performing generation is stable, the investment income may decline quarter - on - quarter, but the year - on - year growth rate of performance will remain stable. The overall performance of bank stocks was sluggish in the third quarter, but it is expected that starting from the fourth quarter, absolute - return funds will layout for next year, and the cost - effectiveness of the banking sector will be significantly improved.
*Disclaimer:
The content of this article only represents the author's views.
The market is risky, and investment should be cautious. In any case, the information in this article or the opinions expressed do not constitute investment advice to anyone. Before making an investment decision, if necessary, investors must consult professionals and make careful decisions. We have no intention to provide underwriting services or any services that require specific qualifications or licenses for all parties in the transaction.
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