Optimistic about dividends and profit margins, JP Morgan is bullish on Bank of China stocks

Thanks to the stability of net interest margin, growth in fee income, and high dividend returns, Bank of China stocks are expected to continue rising in the second half of the year.

JP Morgan analyst Katherine Lei predicted in a research report that A-share bank stocks could rise by as much as 15%, while H-share bank stocks are expected to climb by 8%. She forecasts an average dividend yield of about 4.3% for the mainland-listed bank stocks covered by JP Morgan this year.

“We remain optimistic about the Chinese banking sector,” Lei noted in the report, “sufficient liquidity and a weak macro backdrop will continue to favor the flow of funds into high-dividend stocks.”

In an environment of slowing economic growth in Asia, Chinese bank stocks are increasingly becoming a safe haven for investors seeking stable returns, the Hong Kong-listed Chinese bank index has surged about 25% this year, and the Shanghai Composite Index has also reached a ten-year high driven by bank stocks.

Dividend Advantage Attracts Income-Focused Investors

JP Morgan expects the average dividend yield of the A-share bank stocks it covers to be about 4.3% this year, which is particularly attractive in the current environment of generally declining yields. As bond yields decrease, institutional investors such as insurance companies are actively seeking higher returns, making bank stocks an ideal choice.

Lei stated that sufficient liquidity and a weak macro backdrop will continue to drive asset allocation towards high-dividend stocks. This view reflects the market's tendency to pursue certainty in returns during periods of economic uncertainty.

Bank stocks have performed strongly recently and have become a major driver of the Shanghai Composite Index reaching a ten-year high. As heavyweight components of the mainland benchmark index, the performance of the banking sector significantly impacts the overall market trend.

Enhanced Growth Momentum

Lei expects the revenue and profit growth of banks to improve quarter-on-quarter in the second half of the year, mainly due to the improvement in net interest margin and a moderate recovery in intermediary business income. “We believe the interest rate cut cycle is nearing its end, and there may be one or two additional rate cuts in the second half of this year or in 2026,” Lei pointed out in the report.

Against this backdrop, Lei has upgraded the ratings of several bank stocks, including raising the A-shares and H-shares of Bank of Communications from "Neutral" to "Overweight," and upgrading Ping An Bank from "Underweight" to "Neutral."

The stabilization of net interest margin will support bank performance. Although net interest margin has faced significant pressure over the past two years, as the interest rate cut cycle approaches its end, this key indicator is expected to stabilize and gradually improve, thereby enhancing the overall profitability of banks.

JP Morgan lists China Merchants Bank as the top pick among A-share bank stocks, citing its “considerable dividend yield and higher earnings sensitivity to capital markets.” This indicates that banks with diversified income sources and robust dividend policies are more favored in the current market environment