According to data released by the Bancassurance Regulatory Commission on Aug. 10, the cumulative net profit of commercial banks in the first half of this year was 1 trillion yuan, down 9.4% from the same period last year.

In the process of relieving the burden of the real economy in the first half of the year, it should be said that the decline in bank profits was entirely expected by the market.

"- 9.4%" not only represents the real money paid by banks to the real economy, but also stabilizes market concerns about a sharp downward revision in bank performance.

After the boots fell to the ground, the banking sector began to shake higher yesterday.

At present, the market has fully responded to the pessimistic expectations of banks. As an important representative of pro-cyclical, but also with undervalued characteristics of the banking sector, is in a good opportunity for layout.

01 absolute income source 1 low valuation

As a mature industry, the banking industry has the characteristics of stable profit and large market capitalization, but there are two main reasons why investors give Bank of China Ltd. too low valuation:

1. The economic downturn and the impact of public health events have led to concerns about the quality of banks' assets, believing that banks have not fully disclosed bad debts or that some loans cannot be repaid on schedule.

2. On June 17, the National standing Committee clearly proposed to promote the financial system to make a reasonable profit of 1.5 trillion yuan for the whole year, further aggravating the market's worries about the banking industry.

Since the beginning of the year, the valuation of most industries in the market has expanded significantly. The price-to-book ratio (LF) of 18 industries in the Shenwan industry classification has increased by more than 10%, but the valuation of the banking industry has shrunk sharply, with the price-to-book ratio down 15.8%, seriously deviating from the market trend.

As of August 8, 2020, the banking industry has a price-to-book ratio (LF) of 0.69 and a price-to-earnings ratio (TTM) of 6.13, ranking first from the bottom of all industries.

The current price-to-book ratio of the banking industry is 0.69

The current price-to-earnings ratio of the banking industry is 6.13

From the perspective of individual stocks in the banking industry, among all 36 listed banks, only 8 banks have a price-to-book ratio greater than 1, of which the highest price-to-book ratio of Ningbo Bank is only 1.99, and the overall clean-up rate of the industry is as high as 77.8%.

Only 8 listed banks have a price-to-book ratio greater than 1.

Although valuations in the banking sector have been repaired since July, the extent of the repair is far from that of the rest of the industry-the price-to-book ratio of the banking sector is only 2.9 per cent higher than at the beginning of July, and the percentage increase in valuation is only higher than that of the media industry.

Under such circumstances, we believe that the risk of continued decline in the banking sector is very limited.

02 the second absolute income: the starting point of economic recovery

Even so, we know that low valuations and low risk can never be equated.

Low valuations are just an introduction, not the point. Under the quarterly repair growth of the economy, the pro-cyclical direction is the text.

In the second half of 2020, China's economy will be repaired quarter by quarter:

1. The downside risk of the economy is small, and the subsequent quarter-by-quarter rise will rise to 6.3% in the third quarter, 7% in the fourth quarter, and more than 12% in the first quarter of 2021. Inflation risk can be controlled.

2. Infrastructure laid the foundation for economic recovery throughout the year, and consumption and exports recovered quarter by quarter in the second half of the year.

3. The meeting of the Politburo in the middle of the year maintained the tone of "six guarantees" and "six stability", the monetary policy was neutral, and the overall monetary and financial environment was still relatively loose.

The world's major economic growth forecast that China "outshines others"

As the economy improves in the second half of the year, we believe that the banking sector will follow the economic recovery to an inflection point:

(1) the marginal improvement of credit demand under the economic recovery. Infrastructure construction, as the basis of economic recovery in 2020, can expand the scale of bank loans and help banks to pay premium by volume.

(2) under the economic recovery, the marginal monetary policy tightens, the pace of interest rate reduction and reserve requirement reduction slows down, and bank lending rates do not have significant downward space, which helps to alleviate the pressure of narrowing bank interest spreads.

(3) the economic recovery improves the margin of credit risk, and the bad growth slows down under the sustained economic recovery.

(4) interest 1.5 trillion need not be interpreted too pessimistically. Banks can make profits by lowering deposit interest rates, delaying loan repayment and other ways, but not by "making profits".

From a specific point of view, we think that the banking industry may usher in the turning point of the industry boom in the second quarter of 2021.

In our previous report, "30 years of agitation: sources, Trends and fluctuations of the Banking Business cycle", we pointed out that the banking industry is a typical post-cyclical industry, and the debt cycle is about 1-1.5 years ahead of the banking business cycle.

Considering that under the stimulus of macro-control policies, the debt cycle is confirmed to pick up at the end of 2019, and credit and social finance continue to improve in 2020, we judge that the inflection point of the banking business cycle may come in the second quarter of 2021.

According to the relationship of the debt cycle leading the bank business cycle, the second quarter of 2021 may usher in the inflection point of the industry boom.

Fundamental bottoming helps to build investment confidence, and expectations often precede fundamental movements, so they need to be laid out in advance.

03 the source of absolute income three high dividends

Plate high dividend is a strong guarantee of absolute income, purely from the dividend point of view, the current banking sector has been very cost-effective, stock and debt performance-to-price ratio is close to an all-time high.

We subtract the one-year financial yield and the 10-year Treasury yield from the five major banks to measure the spread between dividends and bonds, which are currently 2.7 per cent and 1.6 per cent, respectively, close to an all-time high.

These two data, to a large extent, show that the performance-to-price ratio of stocks and bonds is extremely skewed towards bank stocks, which will drive some of the funds to buy bonds or bank wealth management to allocate high-dividend banks.

At present, the spread between stock and debt is close to the highest level in history.

04 two major configuration ideas

To sum up, it can be seen that bank stocks have valuation advantages and dividend advantages, which is the best choice for absolute income at present.

From the perspective of configuration, we mainly recommend the following two subdivision lines:

1. Retail banks with offensive attributes are expected to be the first to appear inflection points.

2. Large state-owned enterprises with absolute income and adequate safety cushion.

From the perspective of segment attributes, we believe that the undesirable expected inflection point of retail banks will be the first to appear, mainly based on:

1. On the denominator side, retail lending quickly returned to pre-public health levels.

2. On the molecular side, the repayment ability of retail customers took the lead in repairing, and technical defaults decreased.

3. On the confirmation side, the policy disturbance of retail banking is less, and the bad uncertainty will be eliminated first.

As a result, retail banks will enjoy a deterministic premium and the bellwether effect in the sector continues to strengthen.

From the perspective of the pursuit of absolute income, we believe that as the deduction of the performance-to-price ratio of stock and debt tends to the extreme, the state-owned banks with high dividends are currently in the third golden allocation period in history, and the state-owned banks with thick safety pads are recommended.