Zhongtai Securities released a research report stating that with the regulatory relaxation of capital advanced approach acceptance, comparing with the case of China Merchants Bank, the advanced approach significantly saves capital, with the core Tier 1 capital adequacy ratio being about 2 percentage points higher than the standard approach. The bank suggests that currently, in a stage where the market prefers improvement + there are differing future economic expectations, it focuses on recommending high-quality city and rural commercial banks with debt yield benefits, choosing city and rural commercial banks with large fundamental certainty and cheap valuation; secondly, if economic expectations continue to improve, it recommends the core assets in banks; thirdly, in the case of a weak economic recovery and benefiting from debt yield, high dividend yield varieties, choose large banks.

Zhongtai Securities' main points are as follows:

Currently, six banks apply the advanced approach (i.e., internal rating-based approach). Recently, the regulators have opened up applications for acceptance by other banks, following a "mature one, accept one" approach. The advanced method of capital measurement is the internal models approach, wherein banks use internal models to estimate certain parameters to measure risk-weighted assets. Currently, six banks (ICBC, ABC, CCB, BOC, CMB, CIB) apply this method. On November 1, 2024, the China Banking and Insurance Regulatory Commission issued the "Provisions on the Implementation of Capital Measurement Advanced Approaches for Commercial Banks Application and Acceptance," indicating that the original six banks will continue to apply the advanced method to their credit risks, while other risks will be accepted separately, following a "mature one, accept one" approach.

The current application status of the six banks approved to implement the advanced approach: Credit RWAs using internal models account for 65.4% of total credit RWAs. (1) The current application status of the six banks approved to implement the advanced approach: companies that meet regulatory requirements apply the basic internal ratings-based approach to credit risks, retail credit risks apply the advanced internal ratings-based approach, credit risks not covered by internal approaches apply the standard approach, market risks apply the standard approach, operational risks apply the standard approach. (2) As of 3Q24, credit RWAs of the six banks account for 91.2% of total RWAs. Looking at the structure of credit RWAs, the standardized approach accounts for 32.8%, the internal ratings-based approach accounts for 65.4%, with the basic internal ratings-based approach accounting for 53.2%, and the advanced internal ratings-based approach accounting for 12.2%.

China Merchants Bank Case: The advanced approach significantly saves capital, with the core Tier 1 capital adequacy ratio being about 2 percentage points higher than the standard approach. (1) Observing the financial report data of China Merchants Bank for 1H24/2023/2022, the proportion of RWAs calculated by the advanced approach to RWAs calculated by the standardized approach remains at around 85%, saving 15% of RWAs, and the calculated core Tier 1 capital adequacy ratio by the advanced approach is on average about 2 percentage points higher than that of the standardized approach. (2) A detailed breakdown of the retail or non-retail risk exposure under the internal ratings-based approach and the standardized approach shows that the internal ratings-based approach significantly saves capital.

Postal Savings Bank, CITIC Bank, and Industrial Bank have publicly announced that they have initiated the application of the advanced approach and have been approved by the board of directors. Assuming Postal Savings Bank, CITIC Bank, and Industrial Bank are the first to implement the advanced approach, if the advanced approach saves 10% of their risk-weighted assets, the core Tier 1 capital adequacy ratio of the three banks is expected to increase by 1.05/1.06/1.08 percentage points; if it saves 15% of risk-weighted assets, the expected increase in the core Tier 1 capital adequacy ratio of the three banks would be 1.66/1.68/1.71 percentage points.

The acceptance process is expected to take how long: It took 4 years for China Merchants Bank to go from formal evaluation to formal approval, but currently some state-owned banks are more prepared, and the regulators have more acceptance experience, coupled with the "New Capital Regulations" being officially implemented for one year, so the current acceptance time is expected to be greatly shortened.

Requirements during the parallel period: The "New Capital Regulations" retains the requirement of "at least a three-year parallel period", but lowers the capital adequacy ratio to 72.5%. The capital regulations in 2012 required banks granted approval to implement the advanced approach to have at least a three-year parallel period, with capital adequacy ratios of 95%, 90%, 80% respectively within three years (i.e., RWA calculated under the advanced approach must not be less than 95%, 90%, 80% of RWA calculated under other approaches). In 2023, the "New Capital Regulations" will unify the capital adequacy ratio to 72.5%.

If the subsequent landing of first-tier banks after going public is achieved, the core Tier 1 capital adequacy ratio of the sector will increase by more than 1 percentage point. (1) Assuming all subsequent listed commercial banks adopt the advanced approach, if they save 10% of risk-weighted assets, the increase in core Tier 1 capital adequacy ratio for commercial banks will be 1.04 percentage points. If they save 15% of risk-weighted assets, the increase in core Tier 1 capital adequacy ratio for commercial banks will be 1.65 percentage points. (2) Assuming all subsequent first-tier banks going public adopt the advanced approach, saving 10% of risk-weighted assets will increase their core Tier 1 capital adequacy ratio by 1.05 percentage points. Saving 15% of risk-weighted assets will increase their core Tier 1 capital adequacy ratio by 1.68 percentage points.

Risk warnings: Economic downturn exceeds expectations; Financial regulatory measures exceed expectations; Delayed updates in research reports; Policies are not implemented as expected