According to the report released by citic sec, the value increase of bank stocks comes from the logical deduction of investors rebuilding the framework of RMB large asset investment: low volatility stable products are the realistic choice for equity value protection under this framework. Stable expectations of net assets are key to banks being included in low volatility stable products. The alleviation of real risks brought by policy support, especially the alleviation of credit risks in urban investment and real estate sectors, forms a solid foundation for the stability of bank net assets; of course, the cost of a solid foundation is the decline in interest margins and financing dilution. Cost is not the main contradiction; it is the cost of solving the main contradiction, and the cost does not seem to be high. The resolution of the main contradiction determines the direction of valuation. It is necessary to reassess the investment value of bank stocks and reap the benefits of policy dividends. In the process of general rise, choose individual stock varieties with high certainty (low risk), high space (valuation space), and sustainability (balance between beta and alpha).

On individual stocks, two main recommendations are: 1) The dividend logic still has room for growth. Big banks with high dividends and high capital have more allocation value; 2) The growth logic is starting to unfold, and companies with sustainable alpha have more room for valuation growth.

Subject:

On October 18th, at the Financial Street Forum Annual Meeting, Pan Gongsheng, Governor of the People's Bank of China, delivered a keynote speech. On the same day, the People's Bank of China and the China Securities Regulatory Commission jointly issued the "Notice on Matters Concerning the Establishment of Stock Repurchase and Increase Re-loans"; in addition, according to the official website of the six major state-owned banks, the negotiable deposit rates for demand deposits were lowered by 5 basis points, and the negotiable deposit rates for fixed-term deposits of various tenures were lowered by 25 basis points each. On October 17th, the State Council Information Office held a press conference where the Minister of Housing and Urban-Rural Development, Ni Hong, together with officials from the Ministry of Finance, Ministry of Natural Resources, People's Bank of China, and the China Banking and Insurance Regulatory Commission introduced relevant information on promoting the stable and healthy development of the real estate market.

The main points of the Citic Securities research report are as follows:

How to understand the central bank's policy goals and directions? To promote economic stability and improvement, support the resolution of risks in key areas.

With strong policy support, the economy is being stabilized and improving. Governor Pan mentioned at the Financial Street Forum, "The current economic running situation and problems mainly manifest at the macro level as insufficient effective demand, weak social expectations, low price operation, etc. It is widely believed that substantial macro policies need to be introduced." In addition, Governor Pan mentioned in discussing the policy target system, "Promoting a reasonable rise in prices will be an important consideration, paying more attention to the role of price-type adjustment tools such as interest rates." Governor Pan's speech reflects the central bank's goal and intention to help the economy stabilize and improve, and promote a reasonable rise in prices, with more "substantial" monetary policies expected to be further enhanced.

Supporting the risk mitigation in the real estate and stock market sectors. Governor Pan emphasized, "There are still some prominent contradictions and challenges in the current economic operation, mainly in the real estate and capital markets. Based on international experience and China's past practices, targeted policies need to be introduced to address them." Regarding real estate, the central bank has optimized and adjusted multiple real estate financial policies; regarding the capital markets, the central bank has developed two tools: convenience swaps and share buyback and increased holdings refinancing. From the perspective of financial macroprudence, supporting the risk mitigation in key areas is one of the core policy goals of the central bank, with the bank sector expected to significantly benefit from this direction.

How to evaluate the impact of the reduction in deposit benchmark interest rates on interest rate spreads? The magnitude of the reduction in deposit rates exceeded expectations, and with the cost savings of liabilities, it is expected that the decrease in interest rate spreads in 2025 will be limited.

This round of benchmark interest rate reductions will save the banking industry's annual deposit interest expenditure by over 400 billion yuan, effectively address the adjustment of existing mortgage rates and potential LPR adjustments. According to the PBOC's disclosed data on the renminbi credit balance sheets of large national and small banks, the total scale of commercial banks' current deposits/fixed deposits reached 107.4 trillion/173.5 trillion yuan respectively. Assuming that the rate adjustment of other commercial banks is close to that of the big banks, this rate reduction is estimated to save the banking industry's interest expenditure by more than 400 billion yuan per year (assuming full repricing of deposits). In addition, Governor Pan mentioned at the 2024 Financial Street Forum that the adjustment of existing home loan rates will "reduce annual family interest expenses by about 150 billion yuan". Overall, this deposit interest rate adjustment effectively addresses the adjustment of existing mortgage loan rates and the LPR reduction.

Due to the faster effect of asset repricing compared to deposits, it is expected that the interest rate spread will continue to decline quarterly from the 4th quarter of 2024 to the 2nd quarter of 2025. The saving effects of lower liabilities costs will begin to strengthen in the second half of 2025. Since the beginning of this year until September, the 1-year/5-year LPR has been reduced by 10bps/35bps respectively, and Governor Pan stated at the Financial Street Forum on October 18 that, "The loan market quoted rate LPR announced on October 21 will decrease by 0.2-0.25 percentage points." Considering the repricing of LPR and the impact of the adjustment of existing mortgage rates, it is expected that the banking sector will face downward pressure on interest rate spreads starting from the 4th quarter of 2024, compounded by the impact of bond maturity, leading to a continuous downward trend in asset yields in 2025. However, under the background of "protecting bank interest rate spreads," the effect of cost savings on liabilities costs will be lagged, and with the possible reduction in deposit benchmark rates in 2025, it is expected that interest rate spreads will stabilize in the second half of 2025, with a decrease of within 10 BPs for the whole year.

How to understand the policy of share buyback and increased holdings refinancing? The loan system and internal control measures still need to be improved, providing more uplifting effects to listed companies with good shareholder qualifications and low valuations.

Within the broad framework of meeting the requirements of the notice, the key business directions may include high-quality enterprises in line with national key strategic orientations, enterprises with market value management and value enhancement needs, high-quality shareholder enterprises with long-term strategic investment and financial investment needs, etc. Considering the encouragement in the notice for central enterprises to take the lead, financial institutions and qualified state-owned enterprises are encouraged to explore loan provisions. According to China Securities News, as of October 20, 23 listed companies in Shanghai and Shenzhen have successively announced that the company or major shareholders have signed loan agreements or obtained loan commitment letters from banks, and will use the loan funds to carry out share buybacks or increase shareholder holdings, involving amounts exceeding 10 billion yuan. The rapid implementation of the first batch of refinancing reflects the positive willingness of all parties to participate, which is expected to significantly boost market confidence.

How to anticipate the credit risk situation in the real estate sector? The logic of banking sector transactional debt risks in the real estate sector is stronger than demand growth logic. Therefore, easing the credit risks in the real estate sector will directly benefit banks by reducing asset impairment provisions and stabilizing net assets.

The intensified financing support policy has eased the liquidity pressure on real estate developers. The press conference mentioned that loans for "white-listed" real estate projects have reached 2.23 trillion yuan and it is expected that by the end of 2024, the approved loan amount for "white-listed" projects will double, exceeding 4 trillion yuan. According to the August 21st State Council Information Office's press conference on "promoting high-quality development," the approved loan amount has reached 1.4 trillion yuan, with a 400 billion yuan increase in development loans, which is lower than the approved project amount. Looking ahead, there is a disparity between the approved loan amounts and the actual loan increment, but the intensified financing support policy is beneficial in further reducing the liquidity and debt pressure on real estate developers, aiding in alleviating bank credit risks.

Investment strategy:

The macroeconomic growth rate has significantly declined; banking asset quality has deteriorated more than expected; regulatory and industry policy changes have exceeded expectations; and the execution of development strategies by various companies has been below expectations.