Jitong Finance and Economics APP learned that Orient Securities released research reports stating that the fiscal and monetary policies in 2025 maintain a positive tone, with the large-scale debt plan already implemented. The overall impact on bank interest spreads is controllable, and the actual profit loss from an EVA perspective may be limited. The expectation of significantly improved asset quality is likely to drive bank valuation recovery. There is still considerable room for improvement in the central government's deficit ratio, and incremental fiscal policies are worth looking forward to, supporting social financing and boosting economic expectations. Counter-cyclical varieties are expected to benefit. At the same time, under policy support, the risk expectations for real estate and urban investment assets are expected to significantly improve. Part of the retail loan varieties with sufficient risk exposure and disposal are also expected to reach a turning point in asset quality.

Orient Securities' main points are as follows:

Fiscal policy remains crucial, with the accelerated debt conversion significantly affecting the fundamentals of banks in 2025.

Orient Securities predicts that the fiscal and monetary policies in 2025 will maintain a positive tone, with the large-scale debt plan already implemented. Based on this background, the outlook for bank operations includes: existing debt will be transformed, incremental fiscal deficit budget may be raised, loan growth rate may stabilize with a downward trend, and social financing growth rate is expected to rebound. If the central government deficit ratio rises by 0.5-1.5 percentage points, the estimated loan growth rate for 2025 would be between 7.1% - 7.6%, and social financing growth rate between 8.1% - 8.9%. The overall impact on bank interest spreads is controllable, and the actual profit loss from an EVA perspective may be limited. The expectation of significantly improved asset quality is likely to drive bank valuation recovery.

Focus on the repricing effect of high-interest fixed deposits reaching maturity, where the downward pressure on full-year interest spreads may gradually ease.

Orient Securities expects that the full-year interest spread of the banking industry in 2024 is likely to be maintained at above 1.50%, with a decrease of 10-12 basis points for the full year of 2025. It is calculated that the lowering of LPR, downward adjustments to existing mortgage rates, and debt conversion collectively drag down the 2025 interest spread by 17-18 basis points. There is a considerable downward pressure on funding costs, and it is estimated that the concentrated maturity of high-interest fixed deposits can improve the 2025 interest spread by 6-8 basis points. The self-regulation of interest rates for non-bank interbank deposits landing may improve the interest spread by 2.5 basis points under a neutral scenario.

How to view the contribution of non-interest income to revenue in 2025?

Non-interest income in 2025 is expected to remain stable. With a low base, as wealth management scale is restored and the stock market marginally warms up, the growth rate of banks' net fee income in 2025 is expected to continue to improve slightly. Market concerns about other non-interest income in 2025 potentially causing significant drag on bank revenue may not be a major worry from the perspective of the supportive monetary policy and bank investment behavior.

Under policy support, asset quality is expected to remain stable, with a focus on the disturbance of core indicators at the end of the transitional period of the new risk classification regulations. Looking ahead to next year, individual loans are a key influencing factor on the overall asset quality of banks, suggesting attention to the possibility of turning points in consumer loans and credit card asset quality. However, asset quality of small and micro enterprises might still be under pressure, and the implementation of the policy on repayment and further lending is expected to help stabilize risk exposure. Corporate asset quality is expected to continue its steady improvement trend, especially as local debts extend from operating debts to implicit debts, leading to a systemic improvement in urban investment asset quality.

Furthermore, 2025 is the final year of the transitional period for the new risk classification regulations, during which some banks may experience fluctuations in their non-performing indicators, with some facing pressures on provisioning, mainly evident in joint-stock banks and weaker regional city commercial banks.

Outlook on key issues of bank capital and refinancing

After the implementation of the new capital regulations, the improvement in bank capital adequacy ratio is quite noticeable. Considering the thickness of capital safety cushions and the situation of convertible bonds, some joint-stock banks and city commercial banks may have a relatively strong performance release momentum. The relaxation of senior supervision rules will favor capital savings, especially with a significant expected reduction in non-retail risk weights, though the implementation timeline is anticipated to be longer. The scale of recapitalization by large banks could reach the trillion level, with the issue price being relatively crucial. Static calculations suggest a dilution ratio of EPS and dividends in the range of 8%-13%, and a dilution ratio of ROE within 4%.

Currently, we are entering a period of intensive implementation of stable growth policies, with loose monetary policies taking the lead, closely followed by loose fiscal policies. The significant acceleration of local debts is deeply influencing the fundamentals of banks in 2025. There is still considerable room for an increase in the central government deficit ratio. Incremental fiscal policies are worth anticipating, supporting social financing and boosting economic expectations, benefiting pro-cyclical varieties. A broad downward range of interest rates is putting short-term pressure on banks' net interest margins, but high-interest deposits entering a cycle of concentrated repricing, combined with ongoing regulatory crackdowns on attracting high-interest deposits, are crucially safeguarding banks' interest margins in 2025. 2025 is a year of solidifying bank asset quality under policy support, where expectations are for significant improvements in the risk outlook of real estate and urban investment assets, and certain individual loan varieties with fully exposed risks may reach a turning point in asset quality.

Currently, focus on two investment themes

Risk expectations improve varieties. The acceleration of local government bond issuance boosts the banks' political assets quality expectations. It is suggested to pay attention to Chongqing Rural Commercial Bank (601077.SH), Bank of Chongqing (601963.SH). Consumer loans and credit cards are expected to reach a turning point in asset quality, it is recommended to focus on Ping An Bank (000001.SZ).

Pro-cyclical varieties are recommended. It is suggested to focus on CM Bank (600036.SH), Jiangsu Changshu Rural Commercial Bank (601128.SH), Bank of Jiangsu (600919.SH), Bank of Nanjing (601009.SH), Bank of Hangzhou (600926.SH), Bank of Chengdu (601838.SH).

Risk warning

Economic recovery is not as expected; risks spread in key areas such as real estate; changes in assumptions affect the calculation results.