The Zhitong Finance app learned that CITIC Securities released a research report saying that as far as bank sector investment is concerned, the core logic of the industry in 2024 is valuation increases under the weak economic recovery in the transition year. Under the combined effects of underperformance and valuation bottom-line, it is recommended to focus on valuation improvements brought about by economic recovery trends. At the individual stock level, we can focus on three main lines: 1) The defense targets are mainly large banks. The core is the high certainty return brought by dividend yield and valuation repair under the logic of low-risk assets; 2) flexible targets, where the core is that the elasticity of economic recovery brings significant room for valuation repair; 3) long-term targets, the core focus is on sustainable endogenicity, 2024 is expected to become a transition year.

Matters:

On December 21, 2023, according to the Securities Times · Broker China report, starting December 22, a number of major state-owned banks will once again lower deposit listing interest rates. Among them, the Industrial and Commercial Bank has published the “Instructions on Adjusting Interest Rates on RMB Savings Deposit” on the App. The listing interest rates for time deposits of 1 year and less, 2, 3 years, and 5 years will be reduced by 10 bps, 20 bps, 25 bps, and 25 bps, respectively.

▍ The main views of CITIC Securities are as follows:

Background of the adjustment: Stabilize bank debt costs and ease the trend of long-term deposit regularization.

Since this year, the total amount of domestic deposits has increased a lot, and the trend of regularization has continued. As of the end of November, the balance of various domestic deposits in RMB was 283.0 trillion yuan, up 10.3% year on year, up 25.5 trillion yuan from the beginning of the year; at the same time, households and non-financial enterprises accounted for 53.3% of non-current deposits, an increase of 2.4 pcts over the beginning of the year. In this context, bank debt costs are still under some pressure. It is estimated that the 2023Q3 interest-bearing debt cost ratio of listed banks is 2.09% for a single quarter, continuing to rise 3 bps from 2023Q2 (2.06%).

At the end of November, the central bank continued to mention “giving full play to the important role of market-based adjustment mechanisms for deposit interest rates” and added the statement “stabilizing bank debt costs and enhancing the sustainability of financial support for the real economy” in the “Report on the Implementation of China's Monetary Policy for the Third Quarter of 2023", reflecting that the central bank still regards the rational operation of bank debt costs as an important variable in the sustainability of bank operations.

Bank impact estimation: A positive contribution to the annualization of deposit costs and net interest spreads of major state-owned banks is about 4 bps/3 bps.

According to estimates of the deposit situation of major state-owned banks at the end of the first half of 2023, assuming a uniform distribution of maturity cycles, this reduction in deposit pricing has an annualized savings of about 4 bps on the deposit cost rate of major state-owned banks, and the positive contribution to the annualization of net interest spreads is about 3 bps. In addition to direct savings on deposit costs and interest spreads, it is expected that the reduction will also help improve the deposit structure of major state-owned banks and facilitate the healthy and sustainable development of asset liability management.

Industry outlook: Deposit pricing adjustments for stock banks and urban and agricultural commercial banks are expected to continue, creating favorable conditions for banks to support the real economy.

1) Deposit pricing adjustments between stock banks and urban and agricultural commercial banks are expected to continue: the self-regulatory mechanism for deposit pricing will be adjusted first by major banks, and small and medium-sized banks will follow up and make supplementary adjustments according to their own circumstances. It is expected that subsequent deposit pricing adjustments between stock banks and urban agricultural commercial banks will continue, thus benefiting the improvement of the industry's debt costs and interest spreads. Judging from the experience of June of this year, within a week of major state-owned banks cutting deposit listing interest rates, some stock banks followed suit.

2) Create favorable conditions for banks to benefit the real economy: On the one hand, this reduction in deposit pricing will help stabilize bank debt costs and interest spreads, effectively deal with the impact of stock mortgage interest rate adjustments and debt restructuring on interest spreads, create favorable conditions for banks to benefit the real economy, and promote a further reduction in financing costs in the real economy; on the other hand, it helps ease the long-term trend of deposit regularization and enhance the investment and consumption motivation of corporate residents.

Investment perspective: When interest rate policies are carried out collaboratively.

This deposit pricing adjustment is estimated to have contributed positively to the annualization of deposit costs and net interest spreads of major state-owned banks of about 4 bps/ 3 bps. Furthermore, it is expected that subsequent deposit pricing adjustments for stock banks and urban agricultural commercial banks will continue. On the one hand, the reduction in deposit pricing will help stabilize bank debt costs and interest spreads, effectively cope with the impact of interest rate adjustments on stock mortgages and bonds on interest spreads, and create favorable conditions for banks to benefit the real economy, which is expected to further reduce financing costs in the real economy; on the other hand, it will help ease the long-term trend of deposit regularization and enhance the motivation of corporate residents to invest and consume.

As far as sector investment is concerned, the core logic of the industry in 2024 is the increase in valuations due to weak economic recovery in the transition year. Under the combined effects of bottom performance and bottom valuation, it is recommended to focus on valuation improvements brought about by economic recovery trends. At the individual stock level, we can focus on three main lines: 1) The defense targets are mainly large banks. The core is the high certainty return brought by dividend yield and valuation repair under the logic of low-risk assets; 2) flexible targets, where the core is that the elasticity of economic recovery brings significant room for valuation repair; 3) long-term targets, the core focus is on sustainable endogenicity, 2024 is expected to become a transition year.

Risk Factors:

Macroeconomic growth has declined sharply; bank asset quality has deteriorated beyond expectations; regulatory and industry policies have changed beyond expectations; regional economic conditions have declined; and the implementation of companies' development strategies has fallen short of expectations.