Zhixin Finance and Economics App learned that China Securities Co.,Ltd. released research reports stating that with the stabilizing decline in interest spreads, stable expansion of scale, and strong support from other non-interest factors, the revenue of listed banks in 3Q24 improved compared to the previous quarter. Coupled with the overall soundness of asset quality, profits continue to increase slightly by minimizing provisions to ensure profits, leading to a slight increase in performance. However, forward-looking indicators of asset quality are still on the rise, and the deterioration trend in risks such as retail and small business sectors needs continued attention. In terms of banking sector allocation, the current background is characterized by "strong policy expectations but weak fundamentals." Expectations are for further economic recovery driven by the efforts of this round of monetary and fiscal policies, thereby pushing the banking fundamentals to a substantial improvement. Therefore, priority is given to the allocation of targets that benefit from the expected improvement in economic outlook and sector logic conversion following this round of policy shift.

Main viewpoints of Zhongxin Jiandao are as follows:

Steady growth in scale and the stabilization of interest spread declines due to support from the liability side resulted in a narrowing of the net interest income decline. Additionally, strong support from other non-interest income led to an improvement in revenue for listed banks: In 9M24, listed banks' operating income decreased by 1.1% year-on-year, narrowing the decline by 0.9 percentage points compared to the first half of the year. Benefiting from the improved growth rate in scale and the stabilization of interest spread declines due to optimized liability costs, the net interest income decline narrowed on a quarter-on-quarter basis. Meanwhile, middle-end income continues to be under pressure due to fee reductions, but an improvement in wealth management scale also led to a slight narrowing of the decline. Furthermore, the quarter-on-quarter growth rate of other non-interest incomes in the third quarter further increased, providing strong support for revenue. Looking at different banking sectors, revenue of state-owned banks and joint-stock banks decreased by 1.2% and 2.5% respectively year-on-year, while city commercial banks and rural commercial banks saw growth of 3.9% and 2.2% respectively.

The revenue trend is positive, coupled with lower provision releases boosting profits, leading to a slight improvement in performance and a return to positive profit growth rates for major banks. In 9M24, listed banks' attributable net profits increased by 1.43% year-on-year, with the growth rate rising further by 1.06 percentage points compared to the first half of the year. State-owned banks and city commercial banks saw their growth rates increase by 1.8 percentage points and 0.5 percentage points to 0.8% and 6.7% respectively. However, joint-stock banks and rural commercial banks saw a decrease in growth rates by 0.2 percentage points and 1.28 percentage points to 0.85% and 4.9% respectively. Analyzing profit drivers, scale growth was the most significant positive contribution factor, contributing 8.6% to net profits. Other non-interest income and provision allocations also made positive contributions to net profits at 2.9% and 2.6% respectively. Looking at negative contribution factors, narrowing interest spreads and pressure on middle-end income were the main drag factors, negatively impacting profit growth rates by 11.0% and 1.5% respectively.

Credit demand still needs improvement, with a noticeable increase in bill transactions. Quality urban and rural commercial banks in key regions have not experienced a low loan demand: In 3Q24, listed bank assets and loan sizes both increased by 8.2% year-on-year, with a quarterly increase of 1.0% and a decrease of 0.8% respectively. Effective credit demand remains weak, with credit growth rates in a downward trend. Looking at the asset structure, credit accounts for 57.8% of total assets, down 0.4% on a quarterly basis. In terms of loan increments, 3Q24 saw weak corporate loan placements, slight improvement in retail loan placements, and a clear increase in bill transactions. In different banking sectors, state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks saw loan size increases of 9.1%, 4.4%, 11.9%, and 6.4% respectively year-on-year. State-owned and city commercial banks still maintain a leading industry growth rate. Among them, the credit growth of urban and rural commercial banks in Chengdu and Jiangsu-Zhejiang regions is the most robust, and underpinning by the beta of quality regions, credit placements remain relatively optimistic. Looking ahead to 2025, expectations are for a gradual recovery in credit demand under a comprehensive economic stimulus policy, leading to a steady increase in bank scale expansion and further improvement in net interest income.

Corporate deposit funds are flowing out, continuing the trend of deposit transfers, with growth rates still under pressure and the proportion of fixed-term deposits increasing: In 3Q24, total liabilities and total deposits of listed banks increased by 8.2% and 4.5% respectively year-on-year, with growth rates rising by 1.2 percentage points and 0.1 percentage points compared to 2Q24. Looking at the deposit structure, due to outflows of corporate and retail demand deposits, the proportion of fixed-term deposits increased further from mid-year, with fixed-term deposits accounting for 59.2%, 47.3%, 70.0%, and 68.8% in state-owned banks, joint-stock banks, rural commercial banks, and city commercial banks respectively compared to 2Q24.

The multiple downward adjustments of the deposit listing interest rates have significantly optimized the liability costs, stabilizing the 3Q24 interest rate spread. Due to the downward adjustment of existing mortgage rates and LPR, the pressure on the net interest margin in 2025 still exists: the net interest margin of listed banks in 3Q24 (estimated value) dropped by 3 bps to 1.57% quarter-on-quarter, a decrease that is basically flat compared to the second quarter. State-owned banks, joint-stock banks, city commercial banks, and rural commercial banks saw their net interest margins decrease by 2 bps, 1 bp, 2 bps, and 1 bp respectively on a quarterly basis. From the asset side, the third quarter did not see a clear improvement in credit demand, coupled with the multiple downward adjustments of LPRs, asset-side interest rates are still under significant pressure. The interest-earning asset yield in 3Q24 (estimated value) dropped by 6 bps to 3.16% quarter-on-quarter. On the liability side, benefiting from the downward adjustment of deposit listing interest rates, the cost rate of interest-bearing liabilities in 3Q24 (estimated value) dropped by 6 bps to 1.92% quarter-on-quarter, stabilizing the interest spread. It is expected that future optimization of liability costs will be the "winning move" for the differential performance of bank net interest margins. Looking ahead to 2025, based on static calculations, a series of recent adjustments to interest rates on both sides of assets and liabilities are expected to impact the net interest margin of listed banks by around 10 bps.

The non-performing loan ratio and non-performing loan generation rate remain stable, while the watch list continues to rise. Expecting a suite of policies to gradually resolve risks in key areas and further solidify asset quality: the non-performing loan ratio of listed banks in 3Q24 remained stable at 1.25% quarter-on-quarter, while the generation rate of written-off non-performing loans decreased by 3 bps to 0.83% quarter-on-quarter. However, the watch list continued to rise by 5 bps, indicating the ongoing need for attention to asset quality trends. The provision coverage ratio of listed banks in 3Q24 decreased by 1.4 percentage points to 243% quarter-on-quarter, the credit cost ratio decreased by 19 bps to 0.77% quarter-on-quarter, and the risk mitigation capacity remains ample. Particularly in key risk areas, policies related to risk in key areas such as real estate, micro-enterprises, and debt-for-equity swaps are being further strengthened, allowing for the gradual resolution of risks in these areas and contributing to the further solidification of asset quality for listed banks.

The mid-income is under pressure due to the impact of reduced agency sales fees, but is expected to improve in 2025. Other non-interest income may gradually weaken its contribution to revenue: the net fee income of listed banks for the first 9 months of 2024 narrowed by 1.3 percentage points compared to the first half, reaching 10.8%, continuing to be under pressure in the situation of reduced agency sales fees. However, benefiting from the recent trend of deposit transfers, there has been some improvement in wealth management scale, leading to a narrowing of the decline in mid-income. Looking ahead to next year, considering the diminishing impact of the high base effect and the trends of reduced deposit listing interest rates and the relocation of deposits due to manual interest adjustments, there is hope for a rebound in mid-income growth in 2025, with retail banks like China Merchants Bank (CM Bank) potentially benefiting. As for other non-interest income, supported by the relatively favorable performance of the bond market in the first half of this year, the year-on-year growth in other non-interest income for the first 9 months of 2024 was at a high of 25.6%, underpinning revenue growth. However, with the gradual improvement in economic recovery expectations and the bond market entering a phase of fluctuations, the contribution of other non-interest income to revenue will gradually weaken.

In terms of bank sector allocation, the focus continues to be on recommending Hong Kong-listed international major banks in the overseas bank sector: Stanchart (02888) and HSBC Holdings (00005). With the current overseas interest rate reduction cycle, the credit growth of Hong Kong-listed international major banks is expected to improve. Through methods like hedging interest rate risks, they can offset some of the downward pressure on net interest margins. Coupled with the continued growth in wealth management, these international major Hong Kong-listed banks can effectively hedge the impact of interest rate cycles, maintaining a good trend in performance and dividend levels, achieving sustained and stable valuation improvements, highlighting their allocation value. For A-share bank sector allocation, after the release of a suite of policies aimed at stabilizing the economy and easing monetary policy, market pessimism has somewhat eased, economic recovery expectations have improved, and bank valuations have been partially restored under policy support. However, actual macroeconomic indicators are still in a process of gradual recovery, and the bank sector remains in a background of "strong policy expectations, weak fundamentals". It is anticipated that the current round of monetary and fiscal policy efforts will further drive economic recovery, thereby promoting substantial improvement in bank fundamentals. With the improvement in economic expectations brought about by this round of policy shifts and the logical transition in the sector, priorities are given to recommending high-quality bank stocks like China Merchants Bank (600036.SH), Bank of Chengdu (601838.SH), Bank of Nanjing (601009.SH), Jiangsu Changshu Rural Commercial Bank (601128.SH), Bank of Ningbo (002142.SZ), Postal Savings Bank of China (601658.SH) and other quality bank symbols.