HK Financial Stocks Make a Strong Comeback Amidst Favorable PBOC Policies & Fed Rate Cuts

This year, amidst a diminished risk appetite in the Chinese market, banking and insurance stocks have become the preferred choices for high-dividend investments, driving their share prices to rise consistently throughout the year. Following these gains, whether dividends from banks and insurance companies remain a worthy investment and whether their stock prices have room to grow has become a focal point of market interest.

On Tuesday, the People's Bank of China, along with two other departments, issued a "policy package," effectively alleviating concerns regarding the banking sector and bolstering the investment and asset sides of insurance companies. This move further supports the logic behind high-dividend investments in banking and insurance sectors.

From a macroeconomic perspective, the Federal Reserve's decision to cut interest rates by 50 basis points, followed by a similar 50 basis point reduction announced by the Hong Kong Monetary Authority, has enhanced liquidity for Hong Kong stocks, fostering a rise in the broader market.

Prior to the significant policy announcements by the PBOC on Tuesday, the market was apprehensive about the potential impact of "reduced interest rates on existing housing loans" on banks' interest income from mortgages. Concerns were that if deposit rates remained unchanged, banks' costs would not decrease, leading to a narrower net interest margin and adversely affecting bank profits. However, these concerns were alleviated following a series of strategic moves by the PBOC, effectively releasing the market from these worries.

The PBOC announced a reduction in the reserve requirement ratio by 0.5 percentage points, with a potential further cut of 0.25-0.5 percentage points later in the year depending on liquidity conditions. Additionally, policy interest rates have been lowered, with a 0.2 percentage point cut in the 7-day reverse repo rate, which is expected to lead to a concurrent decrease in both lending and deposit rates. These measures have effectively reduced the funding costs for banks from the central bank, stabilizing the net interest margin and alleviating concerns that lower interest rates on existing housing loans would harm bank profits.

Furthermore, in collaboration with the China Banking and Insurance Regulatory Commission (CBIRC), the PBOC is enhancing the core tier-one capital of six major commercial banks. This will be carried out systematically, in stages, and tailored to individual banks.

Zong Liang, Chief Researcher at Bank of China, believes that bolstering the core tier-one capital of these major commercial banks aims to maintain stability in the banking sector, enhance the competitiveness of state-owned major banks, and lay a solid foundation for future loan disbursements and financial system stability.

Insurance funds, known for their large scale, stable sources, and long durations, are considered natural long-term capital in the stock market. Historically, insurance capital has been viewed as the "ballast" for the sustained and healthy development of the capital markets, serving as both economic shock absorbers and social stabilizers. Therefore, the rationale behind investing in high-dividend insurance stocks lies in sharing the returns generated from the investments of insurance companies.

According to Wind Information data, by the end of the second quarter of 2024, insurance funds were among the top ten circulating shareholders in 796 listed A-share companies. These holdings amounted to a total of 89.2 billion shares, with a market value totaling 1.22 trillion yuan. According to incomplete statistics, during this year, insurance funds have taken substantial positions in 12 A-share or H-share listed companies, marking an increase from nine instances last year. This year has seen the highest frequency of such moves by insurance funds in the past four years.

Over the past three years, amidst weakening trends in both the Hong Kong and A-share markets, investment returns for insurance companies have been adversely affected. For instance, as reported in its first-quarter financial statement for 2024, China Ping An experienced a significant decline in net profit attributable to shareholders, down 42.7% year-on-year to 26.063 billion yuan. This downturn can be attributed partially to fluctuations in the equity markets and falling interest rates, which have dragged down investment returns. Additionally, the comparison to a relatively high base period last year further accentuates the decline.

The recent suite of policy measures announced on Tuesday has notably favored the insurance industry, introducing innovative monetary policy tools that are poised to enhance the sector’s investment capabilities.

Firstly, the PBOC introduced a new monetary policy instrument called the "swap facility." This allows eligible securities, funds, and insurance companies to use their holdings in bonds, stock ETFs, and CSI 300 constituent stocks as collateral to exchange for high liquidity assets such as government bonds and central bank notes.

Secondly, the funds obtained via the swap facility are designated solely for stock market investments, with an initial operation scale of 500 billion yuan. This scale may expand depending on future conditions, effectively channeling targeted liquidity into the stock market. This policy enables insurance funds to support the capital market by allowing them to reinvest in the stock market using funds acquired through the swap facility. In the short term, this incremental capital is expected to facilitate price corrections for high-quality listed companies, thereby restoring overall market valuation.

Additionally, national policies have reinforced the role of insurance funds as "patient capital."

The China Securities Regulatory Commission (CSRC), in coordination with relevant departments, has drafted the "Guidance on Promoting the Entry of Medium and Long-Term Funds into the Market," which is set to be issued soon. This guidance focuses on enhancing regulatory inclusiveness for equity investments by medium and long-term funds and fully implementing assessment cycles of three years or longer, topics that have garnered widespread attention from insurance investment officials.