China Financials (H): Top picks in China financials for 3Q26

Research evidence excerpt

China Financials (H): Top picks in China financials for 3Q26

Accessible version

China Financials (H)

Top picks in China financials for 3Q26

Industry Overview

China banks outperformed NBFIs and MSCI China in 1H 26 June 2026

MSCI China is down 14% YTD, dragged by de-rating of internet/software stocks and Equity

weaker domestic consumption. China banks have outperformed, up 4% YTD, while non- China

bank financials are down 13%. Banks’ weighting in MSCI China has rebounded from 7% Banks-Multinational

in Sep-20 to 13% currently, lifting financials’ total weight from 13% to 20%. Investor

interest in the sector is muted, with positioning still heavily concentrated in AI/hardware. Table of Contents

NBFIs have historically been a good proxy for foreign investors’ China “risk-on” trades. China banks outperformed in 1H 2

But as China’s weighting in MSCI EM fell from 31% to 19% over the past 3 quarters, LT earnings and valuation comparison 5

foreign flows have sold NBFIs, while locals have expressed beta elsewhere, mainly via

Focusing on relative value 6

mid/small-cap A-share tech. National Team selling and regulatory cooling of the A-share

markets further added pressure. Insurers also face a high base of investment income in China financials’ performance comparison 6

2025, making their earnings growth this year more dependent on A-share performance. Southbound ownership 6

By contrast, H-share banks’ yield at 5.6% is nearly 390bp above the 10yr CGB yield, still Valuation comp table 6

attractive in a prolonged low-rate environment. Potential RMB appreciation further

supports USD/HKD-denominated EPS and BV growth. Winnie Wu >>

Research Analyst

Merrill Lynch (Hong Kong)NBFIs seasonally better than banks in July +852 3508 3058