According to the research report released by Guosen Securities, the valuation of the banking sector is currently low. After the exposure to real estate risks and the adjustment of existing home loan interest rates, the potential bearishness of the sector has significantly decreased and the downside risk of valuation is small. If the LPR does not decrease significantly in the future, 2025 may see a turning point in performance, which will promote the valuation recovery of the banking sector. Two main investment themes are recommended for individual stocks: First, for funds seeking low volatility and absolute returns, it is recommended to focus on banks with high and stable dividend yields, such as CM Bank (600036.SH) and state-owned banks. Second, from the perspective of growth, it is recommended to pay attention to banks with fast revenue and profit growth, such as Jiangsu Changshu Rural Commercial Bank (601128.SH) and Ruifeng Bank (601528.SH).

Guosen Securities' main points are as follows:

Overall Review: Slight decrease in revenue, slight increase in profit. In the first half of 2024, the total operating income of listed banks reached 2.89 trillion yuan, a year-on-year decrease of 2.0%; the total net profit attributable to shareholders reached 1.09 trillion yuan, a year-on-year increase of 0.4%. Overall, there was not much change compared to the first quarter report, which is in line with previous expectations.

Explanation of Driving Factors: Performance dragged down by net interest margin, and provision contributed to profit. The key driving factors for net profit growth analysis are summarized as follows: Net interest margin continues to drag down net profit growth. Due to factors such as the decline in LPR, adjustment of existing mortgage interest rates, and relatively rigid deposit costs, the net interest margin of banks continues to decline, dragging down revenue and net profit growth, which is currently the biggest source of pressure for banks. Stable generation of non-performing assets, resulting in positive contribution to net profit growth from impairment losses. However, two points should be noted: firstly, some banks may gradually consume their provisions "reserves", and secondly, the overall industry delinquency rate rebounds, and the trend of asset quality needs to be observed in the future. Contribution of interest-earning asset scale has declined. This year, under the high base and policy adjustments, the growth rate of assets has declined.

Industry Outlook: Full-year performance in 2024 may be close to the interim report, and a turning point in performance is expected in 2025. Based on the above analysis, it is believed that the fundamentals of the current banking sector are still under pressure, with little marginal change, and the full-year performance in 2024 may be close to the interim report. It is estimated that the industry's overall performance will see a turning point in 2025, mainly due to the narrowing of the decline in net interest margin. It is expected that both industry revenue and net profit will maintain positive growth in 2025.

Individual Banks: Asset quality and provision allocation are the primary reasons for performance differentiation in the banking industry. In the case of convergence in indicators such as net interest margin and fee income, asset quality and provision allocation remain the primary reasons for the differential growth of net profit attributable to shareholders in different banks, followed by the speed of asset expansion.

Other matters: First, in terms of new loan investment, in the first half of the year, listed banks mainly focused on corporate loans, with the industry distribution mainly in infrastructure construction, industrial sector, and wholesale and retail trade, with some new loans for real estate development. Second, in terms of financial investment in third-party structured entities and credit bonds, listed banks further reduced the scale of non-standard investments in the first half of the year, while the proportion of public funds and ABS remained stable, as well as the proportion of credit bonds. Third, in terms of different types of banks, the key driving factors are similar, with joint-stock banks and rural commercial banks having lower provision coverage ratio than non-performing loan ratio, and they may face greater pressure in future provision coverage, which needs continuous attention.

Risk Warning: If the macroeconomic situation deteriorates significantly, it may have an impact on the banking industry from various aspects, such as net interest margin, asset quality, etc.