UBS: Constructive view on domestic banks with over 5% dividend yield, prefers ICBC, CCB, XCB, and BOC

UBS published a research report indicating that following the injection of RMB 500 billion into the four major banks in March 2025, Bloomberg reported: 1) China is considering issuing approximately RMB 500 billion in special government bonds to supplement the capital of Industrial and Commercial Bank of China (01398.HK), Agricultural Bank of China (01288.HK), and several large insurance companies. 2) About RMB 300 billion (the same below) may be injected into Industrial and Commercial Bank of China and Agricultural Bank of China, while the remaining RMB 200 billion will be injected into China Life (02628.HK), PICC (01339.HK), and China Taiping (00966.HK) among other insurance companies. 3) The injection plan may be announced as early as the first quarter, but specific details remain variable and may be adjusted.

UBS expects that for state-owned banks, the capital injection may be completed in the first half of 2026. Therefore, the dividend distribution dates for the banks may be advanced to late April and early May, rather than the usual June and July. The report indicates that the two major banks receiving RMB 300 billion in capital injection is slightly below UBS's expectations, but the total amount of RMB 500 billion is consistent with previous precedents.

Considering that the core Tier 1 capital adequacy ratio of Industrial and Commercial Bank of China had reached 13.9% by the first half of 2025, UBS expects a larger proportion of the RMB 300 billion injection to flow to Agricultural Bank of China. UBS's base case scenario assumes: Industrial and Commercial Bank of China receives RMB 100 billion, which would increase its core Tier 1 capital adequacy ratio by approximately 0.4%; Agricultural Bank of China receives RMB 200 billion, which means an increase of about 0.8%, but after the injection, Agricultural Bank of China's core Tier 1 capital adequacy ratio would still be below 12%. The injection will dilute the earnings per share and dividends per share of Industrial and Commercial Bank of China and Agricultural Bank of China by approximately 4% and 8%, respectively. If it is assumed that Agricultural Bank of China receives RMB 250 billion/RMB 300 billion, and the pricing is in line with the price-to-book ratio of Industrial and Commercial Bank of China, then the dilution for Agricultural Bank of China will expand to 14%.

UBS observed four key trends following the capital injection into the four major state-owned banks in 2025: 1) Initial stock price increase: One week after the announcement of the capital injection in March 2025, the stock prices of the four major banks rose by 1% to 5%, except for Postal Savings Bank (01658.HK) H shares, as the results were generally in line with expectations and helped eliminate uncertainty. 2) A-shares outperformed H-shares: A-share banks generally outperformed their H-shares, as domestic investors viewed the capital injection as a net positive, while H-share investors were more concerned about dilution effects. 3) Banks with larger dilution experienced lagging performance: Among this group, Bank of Communications (03328.HK) and Postal Savings Bank, facing larger dilution, tended to lag behind their peers. 4) Other events may have a greater impact: In early April, as Trump announced the increase of tariffs in the U.S., bank stocks corrected but still outperformed the market. Bank of China (03988.HK), which has a relatively high proportion of overseas business, performed relatively poorly. Overall, UBS expects that amid capital market volatility, Chinese bank stocks will remain resilient. UBS holds a constructive view on Chinese bank stocks with dividend yields above 5%, preferring H shares of Industrial and Commercial Bank of China, China Construction Bank, CITIC Bank (00998.HK), and Bank of China H shares. Meanwhile, the gradual improvement of the banks' fundamentals should continue to support their stock price performance