Citi issued a report saying that the 21 Chinese banks under its coverage recorded a 9.9% YoY increase in pre-provision operating profit in 1H26, beating expectations, benefiting from strong trading income, resilient loan growth, and stabilizing NIM. Although earnings growth in 1H26 was slower at only 3.2% YoY due to higher credit costs from conservative provisioning and a higher effective tax rate, 2Q26 earnings growth still accelerated to 3.3% YoY from 3% in 1Q26. BANK OF NINGBO (002142.SZ) +0.260 (+0.768%) recorded the strongest pre-provision operating profit and earnings growth in 2Q26, rising 18% YoY and 14% YoY respectively, while CEB BANK (06818.HK) -0.130 (-4.377%) Short selling $29.78M; Ratio 40.159% was the weakest, declining 4.7% YoY and 40% YoY respectively.

Overall, BANK OF CHINA (03988.HK) +0.295 (+5.287%) Short selling $181.62M; Ratio 20.309% , CCB (00939.HK) +0.305 (+3.337%) Short selling $342.22M; Ratio 17.586% , PSBC (01658.HK) +0.365 (+7.366%) Short selling $52.94M; Ratio 41.128% , and BANK OF NINGBO (002142.SZ) +0.260 (+0.768%) delivered better-than-expected results in 1H26, while CEB BANK (06818.HK) -0.130 (-4.377%) Short selling $29.78M; Ratio 40.159% , MINSHENG BANK (01988.HK) +0.145 (+4.394%) Short selling $38.84M; Ratio 21.729% , and INDUSTRIAL BANK (601166.SH) +0.170 (+0.975%) disappointed. Large banks and BANK OF NINGBO (002142.SZ) +0.260 (+0.768%) also exceeded expectations in terms of higher interim dividend payout ratios. Citi's top picks among HK-listed Chinese banks are BANK OF CHINA (03988.HK) +0.295 (+5.287%) Short selling $181.62M; Ratio 20.309% and CCB (00939.HK) +0.305 (+3.337%) Short selling $342.22M; Ratio 17.586% .

Citi said China's six major banks raised their payout ratios by 1 ppt from 30% in FY25 to 31% in 1H26, representing a positive surprise to the market. Reasons for the higher dividend payout ratios include increased funding needs of the Ministry of Finance from dividends paid by large banks; regulatory guidance in China encouraging A-share listed companies to enhance shareholder returns through buybacks/dividends; and the fact that a key factor previously constraining Chinese banks from raising payout ratios was the need to ensure sufficient buffers against potential credit cycles. However, systemic asset quality risks are gradually no longer a major concern, and Chinese banks have already reserved sufficient buffers for the credit cycle.

The broker said that based on a sustainable ROE of around 8% and sustainable loan growth of around 5%, China's large banks are expected to gradually raise payout ratios to around 40%. As Chinese banks' payout ratios catch up with the roughly 40% level of global banking peers, HK-listed Chinese banks should deserve a re-rating. Given that HK-listed Chinese banks are currently trading at an expected 2026 price-to-book ratio of 0.6x with dividend yields of around 5%, this could translate into total capital returns of around 25%.

In addition, the broker expected Chinese bank stocks to continue receiving support from capital inflows due to declining 10-year government bond yields, which widen the spread between Chinese banks' dividend yields and 10-year government bond yields, making Chinese bank stocks more attractive to southbound investors seeking yield; new asset-liability management regulations for insurance companies should encourage onshore insurers to increase allocations to yield assets such as Chinese banks in the future; and given that Chinese banks are among the very few sectors showing a strong negative correlation with AI and tech sector share prices, China and emerging market funds will continue accumulating Chinese bank stocks as a hedge against downside risks from potential corrections in the tech-AI sector.(ha/a)(HK stocks quote is delayed for at least 15 mins.Short Selling Data as at 2026-08-28 16:25.) (A Shares quote is delayed for at least 15 mins.)