According to the Zhongxin Securities report released on the Intelligence Financial App, the "Financial Times" reported on July 12 that the LPR mechanism may be optimized. Currently, OMO has gradually become the core of policy interest rates, optimizing loan pricing benchmarks will help improve interest rate transmission efficiency, balance the goals of capital and credit markets, alleviate the asynchrony of pricing for deposits and loans, and help stabilize banks' interest rate spreads. In addition, financial data for June continued to exhibit characteristics of light scale and optimal structure, and it is expected that monetary and fiscal policies will continue to ensure two-way support for the economy in the next stage. From the perspective of sector investment, the previous multi-party policy efforts have helped improve bank risk expectations and bank stock valuations, which have been further supported by fundamentals and have further solidified the certainty of dividend yield.

According to the Financial Times on July 12th, the loan market quoted rate (LPR) may be improved, and the main improvement direction is to adjust the reference of open market operation rates from the previous one-year MLF rate to a 7-day OMO rate. On the same day, the People's Bank of China released the Financial Statistics Report for the first half of 2024.

Loan pricing benchmarks may be optimized.

According to the Financial Times, the improvement direction of LPR may transition from "LPR=MLF+spread" to "LPR=OMO+spread". In addition, at the Lujiazui Forum, Governor of the People's Bank of China Pan Gongsheng proposed that "a certain short-term operation rate of the central bank can be clearly defined as the main policy rate"; currently, the 7-day reverse repurchase operation rate has basically assumed this function, and the interest rate of other term monetary policy tools can minimize the color of the policy rate, gradually straighten out the transmission relationship from short to long." Moreover, on July 8th, the People's Bank of China announced that "the interest rates for temporary overnight repo operations, both positive and negative, are the 7-day reverse repo operation rate minus 20bp and plus 50bp, respectively", which also uses the 7-day OMO rate as the benchmark for overnight repo rates. In summary, the LPR pricing mechanism is expected to be optimized, and the 7-day OMO rate is expected to become the pricing benchmark for asset-liability ends.

Policy interest rates can be cut short to improve the efficiency of interest rate transmission, balance the goals of capital and credit markets, and optimize the asynchronous pricing of deposits and loans. Specifically:

1) Help build an efficient interest rate system. From international experience (see the report "How to regard the possibility of improving the interest rate transmission mechanism?" by the Research Department of CITIC Securities on March 25, 2024), mainstream practices in the United States, Europe, and Japan generally adopt short-term operational interest rates as the main policy rates, such as the effective federal funds rate (EFFR) in the United States (usually overnight), the main refinancing operations (MRO) in Europe (usually one week), etc., whose transmission mechanism of "policy target rate -> money market rate -> credit market rate" is relatively unimpeded. If this adjustment is true, along with the core policy interest rate switching further from the medium-term to the short-term, the adjustment of policy interest rates will also propagate to various market rates, including money and bond markets, more timely and effectively.

2) Alleviate the contradiction between reducing costs and preventing empty transfers. Under the pricing mechanism of "LPR=MLF+spread", the loan interest rate benchmark is directly linked to the one-year policy interest rate, and the money market rate is also linked to MLF (NCD interest rate at the same term) and OMO (DR007) trends. If this adjustment is true, the central bank will be more flexible in using policy interest rates to maintain the liquidity of the banking system, which will to some extent alleviate the inconsistency between the goals of monetary policy to reduce financing costs (lower loan interest rates) and reduce idle money (stabilize money market rates).

3) Optimize the asynchrony of deposit and loan pricing and reduce basis risk. In April 2022, the guidance interest rate self-discipline mechanism established a deposit interest rate market-oriented adjustment mechanism, and member banks of the self-discipline mechanism refer to bond market rates represented by the 10-year national debt yield and loan market rates represented by the 1-year LPR. However, the advancement of deposit interest rate marketization requires further getting rid of the influence of the traditional benchmark interest rate and strengthening the tracking of short-term deposit products to the money market interest rate benchmark. If this adjustment is true, it will also strengthen the association between the deposit pricing and the OMO rate, guide and incentivize, and may alleviate the impact of asynchronous pricing of assets and liabilities on bank spreads.

Financial data: credit increment continues to slow down, financial quality and efficiency improve.

1) Credit growth is "light scale and optimized structure." In June, RMB loans increased by RMB 2.13 trillion yuan, a year-on-year increase of RMB 920 billion yuan. Among them, the medium- and long-term loans for residents and enterprises seasonally rebounded month-on-month, but they still fell year-on-year, which not only reflected the insufficient effective demand but also further dampened the scale narrative in the economic structural transformation process. However, the short-term loans of enterprises remained relatively stable year-on-year, reflecting the painful period of transformation and the fact that enterprises still maintain reasonable operational demand.

Government bonds made the main contribution to the incremental growth, and the total amount of social financing meets expectations. In June, new social financing was 3,298.2 billion yuan (less than 928.3 billion yuan year-on-year), with a year-on-year growth rate of 8.1%. With the slowdown of special bond issuance in June, the incremental growth of government bonds fell month-on-month, but the year-on-year growth was significant, contributing mainly to the incremental growth of social financing. In addition, under low interest rates, the same period-on-period growth rate of corporate bonds remained stable.

Deposits continued to decrease, and the growth rates of M1 and M2 further fell. In June, the year-on-year growth rates of M1/M2 decreased by 0.8pct/0.8pct from the previous month to -5.0%/6.2%. Although the monetary derivation weakened under the credit contraction, the same-on-period increase of non-bank financial institution deposits reflected the continuation of the trend of funds out of deposits and into broad-based funds under the downward pressure on high-interest deposits.

Investment strategy:

Macro-economic growth rate has fallen sharply; bank asset quality has deteriorated beyond expectations; regulatory and industry policies have unexpectedly changed; regional economic prosperity has declined; and each company's development strategy execution has fallen short of expectations.

Investment perspective: strengthening the connection between finance and the real economy, sector dividends and trading opportunities still exist.

On July 12th, the Financial Times reported that the LPR mechanism may be optimized. CITIC Securities believes that the current OMO has gradually become the core policy rate, and optimizing the loan pricing benchmark can improve the efficiency of interest rate transmission, balance the objectives of capital and credit markets, ease the impact of asynchronous pricing of deposits and loans, and help stabilize bank interest rate spreads. In addition, the financial data in June continued to show characteristics of light scale and good structure. It is expected that monetary and fiscal policies will continue to promote the economy in a balanced manner in the next stage. As for sector investment, the previous multi-policy force can help improve the bank risk expectation, and the bank stock valuation has more fundamental support to further solidify the certainty of dividend income space. In terms of individual stocks, two main lines are recommended: 1) Stable foundation, under the product logic, large banks with high dividends and small fluctuations in valuations are more valuable for allocation; 2) Growth attack: under the growth logic, companies with sustained alpha have more room for valuation improvement.