DBS favours Chinese banks; flags HSBC as long-term buy

[SINGAPORE] Chinese banks are expected to outperform their global peers in the current high-interest-rate environment, as their relatively independent domestic yield movements and attractive dividends offer investors a buffer against global market volatility, said DBS Group Research.

In a report on Oct 20, analysts Lu Manyi and Ken Shih shifted their near-term preference towards Chinese lenders, naming Hong Kong-listed China Construction Bank (CCB) as their top pick. They also identified London and Hong Kong-listed HSBC as an attractive long-term entry opportunity following its recent share price decline.

The outlook comes as China’s five largest banks reported their strongest first-half profit growth in several years, despite the country’s prolonged property downturn. The lenders posted profit increases of between 3 and 5 per cent in the first half of 2026, while non-performing loan ratios held steady or declined.

The broader banking sector also recorded its first quarterly improvement in net interest margins since 2022.

“China banks present a resilient alternative, providing insulation from global rate volatility given a declining domestic yield curve,” the analysts said.

China banks offer alternative to global lenders

DBS analysts noted that global investors have become increasingly concerned about the impact of rising bond yields on banks, as the 10-year US Treasury yield surged past 5 per cent.

Prolonged high rates could weaken credit demand, increase funding costs and expose banks to valuation losses on their bond holdings, they added.

Chinese lenders, however, face a different interest-rate environment.

While global bond yields have risen, China’s 10-year government bond yield has declined to about 1.6 per cent from 1.8 per cent at the start of 2026, making bank dividends relatively more attractive to domestic investors.

DBS said Chinese bank shares also benefit from a different investor base, with domestic insurers and long-term investors seeking dividend income as local bond yields fall.

Southbound capital flows into Hong Kong-listed Chinese banks have exceeded HK$100 billion (US$12.7 billion) so far this year, providing further share price support.

The brokerage expects dividend yields of between 4.5 and 5 per cent for major Chinese banks in FY2026 and FY2027, while valuations remain undemanding compared with regional peers.

It also expects steady Q3 earnings growth and broadly stable asset quality among major Chinese lenders.

Market overreacted on HSBC

While DBS likes Chinese banks for the near term, it also highlighted HSBC as an attractive opportunity for long-term investors, following the recent sell-off in the lender’s Hong Kong-listed shares.

HSBC fell about 15 per cent from its August peak to a trough in mid-October, amid concerns over surging global bond yields and potential increases in UK banking taxes.

DBS argued that the risks are manageable, noting that banks now have healthier balance sheets than during the 2022-2023 tightening cycle.

Unlike that period, when short-term interest rates exceeded long-term rates, the yield curve remains positively sloped, preserving banks’ traditional lending profitability.

HSBC’s underlying growth drivers, including banking net interest income and its Asian wealth management franchise, also remain unchanged.

Based on its first-half balance sheet, DBS estimated that a 100 basis point increase in interest rates could generate about US$2 billion in additional banking net interest income for HSBC.

The brokerage also expects limited earnings impact from potential UK banking tax increases. Even if the bank surcharge rises to 10 per cent from 3 per cent, it estimates that HSBC’s after-tax group profit would fall by less than 1.5 per cent.

HSBC trades at about 1.4 times forecast FY2027 book value and offers a projected dividend yield of 4.8 per cent, according to DBS.

The brokerage maintained its “buy” rating and HK$167.40 target price for HSBC, compared with the HK$149.70 reference price in its report.

However, it cautioned that near-term volatility could persist until uncertainties surrounding UK tax policy and bond valuations are resolved. Bond-related capital losses could also weigh on future share buybacks.

China Construction Bank remains top pick

Among China’s major state-owned lenders, DBS favours CCB for its relatively higher return on equity and attractive dividend yield.

The bank, which is listed in Hong Kong and Shanghai, trades at valuations broadly in line with its peers despite offering a projected FY2027 dividend yield of about 5 per cent.

DBS maintained its “buy” call on CCB’s Hong Kong-listed shares, with a target price of HK$10.20, compared with a reference price of HK$9.87.

The brokerage is less positive on Agricultural Bank of China and Industrial and Commercial Bank of China, citing potential share dilution following capital injections by China’s Ministry of Finance.