According to the Zhitong Finance APP, Cinda Securities has released a research report stating that the banking sector has evident pro-cyclical characteristics. Following the release of bullish signals from loose policies and a rebound in corporate investment demand, it is often accompanied by a recovery in bank stocks. Since 2024, the meetings have conveyed positive signals, boosting market confidence. Policies are expected to be introduced intensively in 2025, which will likely continue to enhance consumption, investment, and other areas. In recent years, China's loan-to-deposit interest rates have been on a downward trend, mainly reflected in reductions in LPR, deposit benchmark rates, and various deposit rates. As banks accelerate risk disposal alongside the expectation of declining deposit rates, banks' interest margin reduction is expected to narrow.

The main points from Cinda Securities are as follows:

Policy guidance promotes the recovery of the fundamentals, and real estate demand is expected to rebound.

Since 2024, meetings have conveyed positive signals that have boosted market confidence. In September, the central bank intensified the strength of monetary policy adjustments and improved the precision of monetary policy controls, including lowering the reserve requirements and policy interest rates, which have driven down benchmark market interest rates; reducing existing mortgage rates and standardizing the minimum down payment ratio; creating new monetary policy tools, and further reinforcing real estate policies. A package of targeted incremental policy measures will be successively introduced to stabilize growth, expand domestic demand, and mitigate risks. Policies are expected to be introduced intensively in 2025, with continued boosts in consumption, investment, and other areas.

The trend of declining loan-to-deposit interest rates remains, and banks' interest margins are expected to stabilize.

In recent years, China's loan-to-deposit interest rates have been on a downward trend, primarily reflected in reductions in LPR, deposit benchmark rates, and various deposit rates. In terms of loan interest rates, there were six LPR adjustments in 2023 and 2024. Regarding deposit rates, bank deposit benchmark rates were lowered three times in 2023. By the end of September 2024, the bank's net interest margin was 1.53%, down 1bp from the end of Q2 2024, continuing the downward trend, putting pressure on bank interest margins. As banks accelerate risk disposal alongside the expectation of declining deposit rates, banks' interest margin reduction is expected to narrow.

Listed Banks' revenue has slightly increased year-on-year, with net interest income being a drag and non-interest income providing support.

Overall, from Q1 to Q3 of 2024, listed Banks' operating revenue decreased by 1.05% year-on-year, with the growth rate narrowing by 90 basis points compared to the first half of 2024. Among them, net interest income decreased by 3.19% year-on-year, with the decline narrowing by 24 basis points compared to the first half of 2024.

In terms of non-interest income, net income from fees and commissions decreased by 10.8% year-on-year, and the decline narrowed by 1.28 percentage points compared to the first half of 2024, while the decrease in interest income and growth rate in middle income has narrowed, contributing to revenue. The growth rate of net income attributable to the parent company continues to improve, with state-owned and joint-stock Banks' profits improving, and the performance growth of high-quality regional Banks is even more prominent. Overall, the main reason is "compensating for price with volume", while the marginal contribution from provisions has weakened.

The net interest margin continues to narrow and is likely to remain under pressure in the short term.

On the asset side, the impact of multiple LPR rate cuts is gradually becoming apparent, credit demand is insufficient, and the proportion of high-interest assets is declining, which has jointly led to a decrease in loan interest rates, thereby driving overall yields down. Additionally, the decline in market funding rates has also brought some negative impacts.

On the liability side, the decline in the cost rate of interest-bearing liabilities is likely primarily due to the downward adjustment of deposit benchmark rates and the decline in market interest rates. Since April of this year, the interest rate pricing self-discipline mechanism has stopped manual interest compensation for deposits, prohibiting disguised high-interest deposit solicitation, which helps further guide the downtrend in Banks' deposit cost rates.

Looking ahead, the Banks expect net interest margins to remain under pressure, but the current net interest margins of Banks are at historic lows, and there is limited room for further reduction. Regulatory authorities have included maintaining reasonable profits and net interest margin levels for Banks into their considerations. Under future policy support such as the adjustment of deposit interest rates, the pressure on Banks' net interest margins is expected to be controllable, and the extent of decline is likely to gradually narrow.

Asset quality remains robust, with a strong ability to withstand risks.

The non-performing loan ratio remains stable, with a slight increase in loans overdue for more than 90 days, and while the standards for loan classification have been marginally relaxed, they are still relatively strict and reliable. The proportion of loans under special attention is rising, but the pressure for hidden non-performing loans is manageable. The coverage ratio of provisions has slightly decreased, but the ability to withstand risks and support profits remains strong. Capital is reasonably abundant, and both internal and external sources of replenishment continue to advance.

On the one hand, listed banks strive to maintain positive growth in net income attributable to the parent company and retain their ability for internal capital replenishment. On the other hand, they are also actively promoting external capital supplementation through methods such as convertible bonds, perpetual bonds, stock allocations, and private placements, combining both internal and external sources to enhance the company's capital strength and lay a foundation for subsequent scale expansion and strategic advancement.

The revenue from the middle segment remains under pressure, while the bond market situation supports significant growth in other non-interest income.

From Q1 to Q3 in 2024, the net income from fees and commissions for listed banks decreased by 10.8% year-on-year, reflecting a growth rate decline of 1.3 percentage points compared to the first half of 2024, which may be related to weak economic expectations, reduced sales income from wealth management products such as funds and financial management due to fluctuations in the capital markets, a decline in demand for credit cards and transaction settlements, and the negative impact of reduced fees in the insurance distribution channels. Aside from net income from fees and commissions, other non-interest income saw a year-on-year increase of 23.9%, maintaining a high level and serving as the main support for the growth of non-interest income, mainly benefiting from the bond market situation boosting investment returns.

Looking forward, as various supportive policies are implemented and take effect, the real economy is expected to recover, demand for transaction settlements is likely to improve, and the activity level in capital markets is anticipated to rise, the performance in the middle segment may see some improvement.

High dividend levels enhance the defensive attributes of banks, and capital increases among major banks are expected to support capital and operations.

Bank stocks typically perform well in the latter half of the economic cycle. As a "reservoir" for the real economy, the banking sector displays clear cyclical characteristics, often accompanying a recovery in bank stocks after policy easing releases bullish signals and corporate investment demands recover. The relatively stable high dividend levels add defensive attributes to the banking sector, providing greater advantages at this moment. The total dividend amount for listed banks is steadily increasing, and the dividend rate remains high.

The dividend yield is one of the important factors for stock selection, and the increase in dividends and dividend yield among listed banks is conducive to driving the growth of bank value and boosting investor confidence. Recently, the Ministry of Finance plans to increase core Tier 1 capital for six major commercial banks. In 2025, it is likely to increase the core Tier 1 capital of state-owned major banks through methods such as investment from the Central Huijin Investment, private placements, and the issuance of special national bonds by the Ministry of Finance to supplement capital. This is beneficial for coordinating internal and external channels to bolster capital and enhance the steady operation capabilities of major commercial banks.

Pay attention to the economic recovery process and the opportunities for valuation repair in bank stocks.

The current PB (LF) of banks is around 0.64x.

1) The high dividend characteristics of banks are quite certain, with total dividends of listed banks exceeding 610 billion yuan in 2023, and more than 10 banks carrying out mid-term dividends. Many banks have stated that the dividend rate is secure, and currently, the dividend yield stability of bank stocks is relatively good.

2) Under the backdrop of special valuation + State-owned Enterprise Reform, bank stocks are usually considered as a defensive sector, and it is recommended to invest in them.

3) Increased policy support is expected to reverse economic expectations; banks are a pro-cyclical sector, and the latter half of the economic cycle often triggers the bank beta market. Policy benefits are expected to improve the fundamentals of banks, while risks in Real Estate and local government financing are likely to be gradually alleviated. Various factors are likely to contribute to the valuation rebound of the banking sector.

It is recommended to pay attention to individual stocks:

1) Scarce high-growth regional banks, characterized by strong fundamentals, sustained performance, and new regional highlights: Qilu Bank (601665.SH), Bank of Qingdao (03866,002948.SZ), Bank Of Ningbo (002142.SZ);

2) With the strengthening of market policies and economic expectations, Real Estate is expected to recover, and banks can look forward to risk alleviation: CM BANK (03968,600036.SH);

3) National Banks with solid fundamentals, low valuations, and high dividends under the backdrop of State-owned Enterprise Reform: Postal Savings Bank Of China (01658,601658.SH), Agricultural Bank Of China (01288,601288.SH), China CITIC Bank Corporation (00998,601998.SH).

Risk factors: Downward macroeconomic growth; policy implementation not meeting expectations; operational risks increase due to business transformation.