According to the Zhitong Finance APP, Shenwan Hongyuan has released a research report stating that no matter whether it is capital-driven under the low-dividend and low-volatility strategy or fundamental changes in profitability that are stable and likely to marginally improve, the banking sector will reap relatively considerable absolute and relative returns throughout the year, and it is currently a good time to allocate assets actively. Economic data is still at the bottom, and the policy promotes consolidation of the upward economic trend. Under the premise of ensuring asset quality safety, we find high-quality and high-dividend stocks or focus on the main market style in the third quarter, and pay close attention to the over-sold stock banks with the expectation of bottom-up improvements in their income statement and a relatively favorable chip structure.

Regarding symbols: 1) Continue holding high-quality regional banks that have long-term performance: Bank of Suzhou (002966.SZ), Jiangsu Suzhou Rural Commercial Bank (603323.SH), Rui Feng Bank (601528.SH), Jiangsu Changshu Rural Commercial Bank (601128.SH) (showing alpha properties); 2) Currently, moderately increase high-quality low-valuation and high-dividend banks: Industrial Bank (601166.SH), Bank of Communications (601328.SH).

Shenwan Hongyuan's main points are as follows:

It is expected that mid-term revenue and profit performance of listed banks will remain under pressure and continue to experience slight negative growth, and the possibility of a significant decrease is extremely low.

Shenwan Hongyuan stated that from the perspective of the pace of the year, it is determined that the income statements of banks are expected to welcome marginal improvements in the second half of the year, and their performance growth rates will gradually transition from negative to positive. Based on the follow-up of key listed banks and model predictions, it is expected that the revenue growth rate of listed banks in the first half of 2024 will be about 2 percentage points lower than that in the first quarter, at about -2%, and the year-on-year decline in net profit attributable to shareholders will narrow to 0.2% (1Q24: -0.8%).

Looking at different types of banks, high-quality regional banks will continue to lead in performance, but attention should also be paid to the bottom-up improvements of some stock banks: it is estimated that the revenue and net profit attributable to shareholders of state-owned banks will decrease by 1.9% and 1.3% YoY respectively, a slight improvement from the first quarter; the revenue and net profit growth rates of stock banks are -3.5% and 0% YoY respectively, with only Industrial Bank, CITIC Bank and Zhejiang Business Bank maintaining positive revenue growth. Attention should be paid to the profit repair of Industrial Bank and Shanghai Pudong Development Bank. High-quality urban and rural commercial banks are still the main players, and the revenue of urban and rural commercial banks is expected to increase by 4% and 2% YoY respectively. Stable revenue growth plus relatively solid provisioning will support significant performance growth rate superiority, with the net income growth rates of banks such as Hangzhou, Changshu and Jiangsu expected to remain above 15%, while the banks such as Suzhou, Ruifeng, Chengdu, and Jiangsu will continue to maintain a double-digit performance growth rate.

Compared with the first quarter report, non-interest income of listed banks is difficult to uplift, mainly due to the need for digestion of negative factors such as fee reductions in distribution business and other unsustainable high growth associated with investment in the bond market. Based on this, we tend to focus on the marginal changes in interest income, especially in the policy environment where long-term, high-interest-rate existing deposits are gradually being repriced, hand-crafted interest payments have been suspended in the second quarter, and the monetary authorities have broken the policy of "only increment of credit." It is now more important to focus on the positive factors of quantity and price:

Fully adapting to the new cycle and new pattern, the growth rate of credit will naturally and inevitably fall back, and credit growth should be stable and practical.

At the end of June, RMB loans under the social financing scale increased by 8.3% YoY, about 2 percentage points slower than the end of 2023. It is estimated that the loan growth rate for the whole year will be around 8.9%, and the newly added RMB loans in the first half of the year were 12.5 trillion, YoY less than 3.1 trillion. Assuming that the total new loans for the year will be 21 trillion, the new loans in the first half of the year account for about 60% of the total, which is basically the same as the average level from 2019 to 2023. Structurally speaking, in the first half of the year, net bills decreased by more than 34 billion yuan (an average of nearly 72 billion yuan in the same period from 2019 to 2023), while medium- and long-term loans for enterprises grew YoY by more than 1.6 trillion yuan less than expected, which is also related to banks actively "squeezing water sources." By analogy with listed banks, it is expected that the credit disbursement of listed banks in the second quarter will generally exhibit the characteristics of "total amount slowdown and more substantial structure.", and the loan growth rate is expected to generally slow down, with no shortage of cases where the loan YoY growth is less than expected. However, at the same time, actively suppressing bills and reducing low-priced credit disbursement will also help stabilize interest rate differential performance.

At the same time, there is objective weak demand and there has not been a clear recovery in the second quarter. ① The slowdown in infrastructure growth has a direct impact on the growth of medium- and long-term loans to enterprises (the cumulative investment growth rate of infrastructure from January to May has further slowed by more than 2 percentage points compared to the end of the first quarter). Although the growth rate of fixed asset investment in manufacturing industry has been maintained at more than 9%, it is expected to be driven by equipment renewal policies, and the investment demand for real enterprises is still to be released. ② As of June, the total amount of household operating loans and short-term loans from enterprises calculated by the central bank increased by nearly 1.4 trillion yuan year-on-year (accounting for nearly 60% less than the industry loan year-on-year decrease), and the demand of small and medium-sized customers still needs to be improved, which is verified by the continuous PMI of small and medium-sized enterprises being lower than the boom and bust line. ③ The growth momentum of retail loans is obviously insufficient, and it is expected that banks will optimize the credit structure in the second half of the year in stages, and certain retail loan quotas will be vacated to the public (from January to June, short-term consumer loans for residents decreased by nearly 40 billion yuan, a year-on-year decrease of nearly 120 billion yuan; since the "5.17" new policy, long-term consumer loans for residents have rebounded, but the cumulative increase since the beginning of the year is only about 19 billion yuan more than the same period last year) .

On this basis, stable and effective investment promotion is a prerequisite for revenue to stabilize earlier and perform better than the industry. We focus on banks that have more grip on asset side investment, including not only national banks that meet the requirements of five major articles, focus on high-quality corporate business, and have more complete credit reserves (except for large banks, such as ZTE in joint-stock banks Business), as well as high-quality small and medium-sized banks that have cultivated high-quality regions, have better credit prosperity than the country, and have been deeply cultivating real customers for many years.

2) The downward trend of interest rate spread is difficult to reverse. However, it is determined that the interest rate spread of listed banks in the second quarter will decrease by 2 bps on a quarterly basis and the annual decline will also converge again. Among them, some banks will achieve a stable trend of flat or slight rise in interest rate spread.

Taking into account the price adjustment, the reduction of mortgage interest rates, and the improvement of deposit costs (including regularization), the judgment on the listed banks' interest rate spread in 2024 is maintained in the strategy report, which is a year-on-year decrease of 10-15bps, of which The decline in 1Q24 has dropped by about 13bps compared to 2023. With the premise that LPR will no longer drop further, it is expected that the additional decline in interest rate spread during the year will be limited.

From the liability side, the effect of stopping manual interest is more obvious on the bottoming out of interest rate spreads of national banks. In addition, the gradual price adjustment of stock deposits and the optimization of deposit structure will continue to improve liability costs. In April, the deposit interest rate self-discipline mechanism was issued to prohibit manual interest supplementation. For banks whose public current deposit interest rates were significantly deviated from the quoted prices before (0.35% for state-owned banks/0.45% for other banks), assuming that their super-autonomous pricing is reduced to the upper limit of negotiated deposit pricing (1.25% for state-owned banks/1.35% for other banks), and considering that some deposits are transferred to fixed deposits, it is estimated that the standardized manual interest supplementation will directly boost the bank's interest rate spread by 3bps, of which Joint-stock banks can boost about 4.6 bps.

At the same time, controlling the cost of liabilities has become the "consensus" of banks to maintain interest rate spreads. The previous downward adjustment of deposit listed interest rates, coupled with the active adjustment of new deposits with long duration, will also gradually release the dividend of improved liability costs from 2024 to 2026 (if all stock long-term deposits are rolled over to maturity, it is estimated that they will add up to raise the bank's interest rate spreads by nearly 30bps from 2024 to 26).

From the asset side, the loan interest rate continued to weaken in the first half of the year, most of which digested the policy impact on the previous stock, and the future trend still depends to a large extent on the recovery pace of real demand. Since the beginning of the year, the loan interest rate has continued to decline year-on-year, which cannot be separated from the impact of policies on loan pricing, including the adjustment of the 5-year LPR, the reduction of stock mortgage interest rates, the reduction of provident fund interest rates and debt conversion, etc. It is estimated that this will drag down the interest rate spread of listed banks in 2024 by 18bps year-on-year. From a month-on-month perspective, the loan interest rate is still difficult to stabilize, which is mainly due to the weak effective demand. Based on this, although the additional space for interest rate spreads to further decline during the year is limited, when it can be transformed from "slow decline" to a stage of "no decline" fundamentally depends on economic performance.

If interest rates are lowered again, re-pricing is also inevitable, and the bank's interest rate spread may still have downward pressure next year (the 25bps drop in 5-year LPR in February this year will drag down the bank's interest rate spread by 5.5bps when re-priced next year; assuming that 1-year and 5 The year LPR each dropped by another 20bps, which will drag down the bank's interest rate spread by about 12bps). Even if the interest rate cut is implemented, the core contradiction is not how much the interest rate spread declines, but whether the economic expectations are substantially improved. If a series of policy punches can reasonably boost effective reproduction and investment demand, this is more critical for banks to supplement quantity with price and support revenue.

Stable asset quality is a high probability event, and the probability of unexpected bad generation under forward-looking risk control is extremely small, but the pace of bad disposition between quarters may cause fluctuations in forward-looking indicators. It is expected that the industry's bad generation rate will rise slightly but overall stable, and high allocation of provisions is still the "core reserve" to ensure asset quality, stabilize performance growth, and replenish internal capital. It is expected that the non-performing ratio of listed banks in 2Q24 will remain unchanged from the previous quarter at 1.25%. In the second quarter, listed banks will pay attention to the gradual downward migration of loans, and coupled with the continued increase in risk disposal in key areas such as real estate and credit cards, the bad generation rate may rise but the amplitude is limited (such as 1Q24 After adding back the cancellation recovery, the annualized bad generation rate of listed banks is about 0.58%, an increase of 1bp from the whole year of 2023 and an increase of 4bps year-on-year). Based on this, it is expected that the provision coverage ratio of listed banks will fall by 2.8 percentage points to 241% month-on-month.

SWHY believes that considering the relatively slow pace of bad disposition in real estate, it cannot be ruled out that some bank's bad indicators will have periodic fluctuations, but the bank's book asset quality is more real, and the relatively solid provisioning basis (the provision-to-loan ratio is at a high level in the past ten years) ）It has also ensured a smooth transition of asset quality. This year, the scissor difference between bank revenue and profit growth rate has gradually converged. From the perspective of asset quality, continue to focus on banks with sufficient reserve foundations, sufficient written-off resources but not consumed too quickly, and low non-performing indicators. Their asset quality will continue to be better than their peers in this round of cycle.

Risk warning: Long-term sluggish real demand, lower-than-expected economic recovery pace; interest rate spreads do not stabilize as expected; some real estate risks, and the exposure of long-tail risks exceeds expectations.