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

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

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China Financials (H/A)

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 8

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 13

2025, making their earnings growth this year more dependent on A-share performance. Southbound ownership 15

By contrast, H-share banks’ yield at 5.6% is nearly 390bp above the 10yr CGB yield, still Valuation comp table 16

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