The Zhitong Finance App learned that Galaxy Securities released a research report saying that interest rate cuts stabilize market expectations while taking into account banks' needs to reduce debt-side costs and stabilize interest spreads during a good start period, which will help drive a steady decline in comprehensive social financing costs. Overall, the steady growth policy continues, the probability of economic stabilization increases, and market liquidity is expected to remain reasonable and abundant, which is conducive to further improving the banking business environment. Strong fiscal policies, optimization of credit structures, stabilization of interest spreads, and continued resolution of real estate and local debt risks will all provide strong support for banks' business expansion and asset quality optimization. The bank is optimistic about the allocation value of the banking sector, adheres to a high dividend strategy, and at the same time focuses on investment opportunities for high-quality regional urban and agricultural commercial banks with strong certainty in performance growth and undervaluation.
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Incident: On January 24, 2024, the central bank decided to lower the deposit reserve ratio of financial institutions by 0.5 percentage points from February 5, 2024 (excluding financial institutions that have implemented a 5% deposit reserve ratio). After this reduction, the weighted average deposit reserve ratio of financial institutions is about 7.0%; starting January 25, 2024, it will reduce agricultural reloans, small reloans, and rediscount interest rates by 0.25 percentage points each. Central Bank Governor Pan Gongsheng said at a press conference held by the State Information Office on the same day that this downgrade will provide the market with 1 trillion yuan of long-term liquidity.
Galaxy Securities's views are as follows:
The timing and magnitude of the overall downgrade exceeded expectations. The aim was to release liquidity and promote the stability of market expectations: due to weak market expectations, the capital market has fluctuated greatly recently. On January 22, the Shanghai Composite Index fell 2.68%, the Shenzhen Composite Index fell 4.47%, and the Shanghai and Shenzhen 300 fell 1.56%. This downgrade has released trillion dollars of liquidity, which will help improve expectations, boost market confidence, and respond in advance to residents' capital needs before the Spring Festival and the consumption of liquidity due to government bond issuance after the Spring Festival.
Structural interest rate cuts have positive significance in relieving banks' repricing pressure and caring for interest spreads at the beginning of the year: this round of interest rate cuts mainly focuses on key areas such as small, micro, private sector, and agriculture, and reduces bank capital costs through refinancing and rediscounting, thus indirectly achieving the effect of guiding loan interest rates downward. The bank believes that the main reason is that the bank concentrated on pricing during the credit opening period at the beginning of the year. At the same time, the credit structure was mainly for low-yield assets such as public and infrastructure loans. Interest rates on superimposed loans are already at historic lows, and the net interest spread level is under great pressure. As of the end of September 2023, the net interest spread of commercial banks was 1.73%. At the same time, according to ifind data, 23 of the 42 listed banks had net interest spreads of less than 1.8%, and the weighted average interest rate for financial institution loans was 4.14%, the low in recent years.
Therefore, compared to comprehensive interest rate cuts, targeted interest rate cuts through structural tools can play a better role in stabilizing bank interest spreads, maintaining banks' reasonable profits, and enhancing the ability to serve the real economy. Without considering incremental credit investment, the bank estimates that the downgrade is expected to improve bank net interest spreads by 0.1 BP. After adding the impact of incremental credit investment, bank net interest spreads will improve by 1.16 BP. At the same time, structural interest rate cuts will generally improve bank net interest spreads by 0.2 BP. These are expected to be transmitted to loan side interest rates and further reduce capital costs for small, micro, agricultural, and private enterprises.
The probability of subsequent LPR cuts increases: 1) The policy orientation remains unchanged and will continue to drive a steady decline in the cost of comprehensive social financing. 2) Major domestic banks lowered deposit interest rates in November-December. Combined with financial institutions' agricultural support, small reloans, and rediscount interest rates were lowered from 2% to 1.75%, which helped drive LPR downward. 3) The market generally anticipates a shift in the Federal Reserve's monetary policy, which is objectively beneficial to expanding the operating space for domestic monetary policy.
Risk warning: the risk that the macroeconomic growth rate falls short of expectations and the quality of assets will deteriorate.