The Zhitong Finance App learned that SDIC Securities released a research report stating that the impact of the current LPR cut on bank stocks is neutral. Undoubtedly, the 5-year LPR cut has further delayed the inflection point of stabilizing net interest spreads, and investors' concerns about the growth rate of banking performance will also rise, but “visible negative effects” and “clearly measurable negative effects” will often be reflected more quickly in stock pricing, and factors affecting bank stocks, in addition to fundamentals, also include valuation, liquidity, macroeconomic policy expectations, etc. The current pricing logic of the banking sector reflects more “high dividend hedging attributes” and “transaction attributes of policy expectations.”
Incident: The People's Bank of China authorized the National Interbank Lending Center to announce that the 1-year loan market quoted interest rate (LPR) was 3.45%, compared to 3.45% last month, unchanged; LPR for a term of 5 years or more was 3.95%, 4.2% last month, down 25 bps, exceeding expectations.
SDIC Securities reviews are as follows:
The LPR was lowered asymmetrically to prevent air circulation, stabilize real estate, and reduce burdens.
MLF interest rates and OMO interest rates were not lowered before this LPR adjustment. Instead, the pressure on bank debt costs was reduced through the deposit listing rate cut in December last year and the downgrade in February of this year, thereby driving banks to “autonomously” lower LPR quotes. On the one hand, it can avoid excessive pressure on Sino-US policy interest rate spreads and ease exchange rate pressure; on the other hand, it can support the real economy to reduce financing costs and achieve the goal of monetary policy adhering to “put me at the center and balance internal and external balance.”
The current 1-year LPR price remained unchanged, and the 5-year LPR exceeded expectations and was lowered by 25 bps. The policy intention may be reflected in the following three aspects:
The first is to avoid interest rates being too low and capital idling. At a press conference at the beginning of the year, the central bank stated that it will “strengthen loan interest rate monitoring and self-regulation management to prevent capital idling and arbitrage in the enterprise sector.” Currently, interest rates on newly issued corporate loans continue to reach record lows. Interest rates on some operating loans and large enterprise loans have been lowered below 3%. In order to prevent enterprises from obtaining low-cost capital through bank credit and then investing in high-yield wealth management products for arbitrage, the central bank needs to maintain a moderate level of policy strength.
The second is to stabilize the real estate market and stimulate commercial housing sales. Reducing the 5-year LPR will help reduce the capital cost for residents to buy homes with a mortgage, drive improvements in commercial housing sales, and appropriately ease the current downward pressure on the real estate market. However, residents' cautious expectations of income and housing prices have also limited the restoration of medium- to long-term real estate confidence, which also requires continued efforts in macroeconomic policies.
The third is to reduce the interest burden on the residential sector and stimulate consumption. Similar to the policy introduced by the central bank at the end of August last year to reduce interest rates for the first home in stock, the current 5-year LPR reduction will help ease the monthly expenses of those with housing stock, ease the pressure on the cash flow of the residential sector, and thus achieve the goal of stimulating consumption. However, considering that most mortgage loans are still repriced on January 1 of every year, there is little impact on most residents' monthly mortgage payments this year. After completing loan repricing next year, they can enjoy the interest rate reduction benefits.
From a medium-term perspective, the bank believes that the 5-year LPR still has room to decline.
Historical data shows that interest rates on personal housing loans have always been significantly lower than interest rates on corporate loans, but since 2017, interest spreads between mortgage loans and corporate loans have continued to rise. In particular, since 2020, when term spreads (mortgage interest rate - 30-year treasury bond yield) have declined and are close to historically low values, interest spreads between mortgage loans and corporate loans are still at a historically high level. This indicates that in an environment where corporate financing costs are declining, residents' financing costs are rising “in disguise”. Currently, the income expectations of the residential sector have declined, and the need to reduce its financing costs has clearly increased. From a medium-term perspective, the bank expects that the 5-year LPR will still have room to be lowered, which will lead to a decline in mortgage interest rates and ease the pressure on the residential sector's cash flow.
However, from the perspective of financial system stability, the reduction in LPR will inevitably put pressure on net interest spreads. It will become more difficult for some small to medium banks to operate, and it will also affect banks' support for the real economy and financial security. The bank believes that while lowering the 5-year LPR to improve the interest burden on the residential sector, it is very necessary to cooperate in lowering deposit interest rates to stabilize commercial banks' net interest spreads or ease their downward pressure as much as possible. Also, considering that the current trend of deposit regularization still exists, changes in deposit structures have weakened the positive impact of lower deposit interest rates, so the reduction in deposit interest rates should probably be made even more vigorous.
The impact of this LPR cut on banking fundamentals in 2024 is limited, and the pressure is likely to rise in 2025.
This year's LPR cut mainly affects banks' net interest spreads through the following channels: first, interest rates on newly issued loans will decline; second, interest rates invested after stock loans expire will be lower than previous interest rates; third, stock loans will be repriced. Stock loan repricing will mainly affect 2025. The bank estimates that the current 5-year LPR reduction of 25 bps will drag down the net interest spread of listed banks by 2.17 bps in 2024, the revenue growth rate by 1.04 percentage points, the pre-tax profit growth rate by 2.41 percentage points; and the ROE by 0.22 percentage points. However, considering the reduction in deposit listing interest rates in December 2023 and the downgrade in February 2024, overall, the net interest spreads of listed banks were boosted by 0.65 bps, revenue growth by 0.55 percentage points, pre-tax profit growth by 0.72 percentage points, and ROE by 0.07 percentage points. Overall, the current LPR cut had little impact on banking fundamentals in 2024, taking into account supporting the real economy, reducing the burden on residents, and the steady development of banks.
Looking ahead to 2025, the impact of stock loan repricing will gradually be unleashed. The bank estimates that it will drag down the net interest spread of listed banks by 7.35 bps in 2025, dragging down revenue growth by 3.51 percentage points; dragging down the pre-tax profit growth rate by 8.15 percentage points, and dragging down ROE by 0.73 percentage points.
The impact of the current LPR cut on bank stocks is neutral. Undoubtedly, the 5-year LPR cut has further delayed the inflection point of stabilizing net interest spreads, and investors' concerns about the growth rate of banking performance will also rise, but “visible negative effects” and “clearly measurable negative effects” will often be reflected more quickly in stock pricing, and factors affecting bank stocks, in addition to fundamentals, also include valuation, liquidity, macroeconomic policy expectations, etc. The current pricing logic of the banking sector reflects more “high dividend hedging attributes” and “transaction attributes of policy expectations.” However, starting from a fundamental perspective, the 5-year LPR reduction and a series of support measures by the supervisory authorities for real estate in the early stages have also marginally allayed concerns about the sharp spread of liquidity risk among housing enterprises, thereby improving pessimistic expectations about asset quality.
Therefore, the bank tends to believe that the impact of the current LPR reduction on the banking sector is neutral. In particular, the stability of the banking sector can play a stable role in the overall capital market, so the banking sector still has good investment opportunities.
Risk warning: The domestic economy declined beyond expectations, real estate default spread again on a large scale, and the decline in overseas demand exceeded expectations.