The Zhitong Finance App learned that Shen Wan Hongyuan released a research report saying that he continues to be optimistic about banks under the bottom of performance (the 1Q24 revenue side is under the most pressure), the bottom of valuation (corresponding to 0.54 times PB in 24 years), and the bottom of positions (but active public funds are still extremely low). The current level of internal individual stock valuations is increasingly converging, and the bank reiterated that it should pay attention to internal rotation from the bottom up. The bank said that the capital market's stock selection for the banking sector ranges from looking for “high performance” to finding “undervalued values,” and it is expected that the next step will be to find cost-effective benchmarks in “high-reserve” banks that have a comparative advantage in fundamentals and relatively low valuations.

Shen Wan Hongyuan's views are as follows:

Why should we focus on “high provision”?

Consider a few grounds: 1) Based on the judgment that listed banks will increase their bad disposal efforts in 2024, add back the bad generation rate or increase at the same time after write-off; 2) It is expected that in 2024 it will be difficult for high-performing banks to have a “20% or even 30% growth rate” in previous years. On the basis of balancing good volume and price, retaining moderate excess provisions to guarantee steady and sustainable growth in medium- to long-term profits is the key; 3) Supplementing external capital is not easy at this stage. Excess provision is also a safety cushion for banks' endogenous capital to a certain extent.

So which banks are good candidates?

Taking into account the compatibility between fundamentals and valuations, such banks are expected to be aggressive, with high-quality regional banks in Jiangsu and Zhejiang as the main players. Focus on banks that have no inventory burdens, are forward-looking, have poor full write-off, and are well-funded. Intuitively, the absolute level of provision coverage is one of the bases for judgment. At the same time, in the post-real estate cycle and end-of-entity risk exposure stage, banks with lower risk exposure, such as real estate and credit cards, should be preferred (such as Changshu, Sunong, Ruifeng, Suzhou); in addition, banks with sufficient full-caliber provisions (credit+non-credit) are also more leeway to support sustainable profit growth.

Further, high-quality urban and agricultural commercial banks can still maintain a credit boom superior to the industry, have stronger interest rate stability, and are expected to take the lead in establishing an inflection point in revenue.

The slowdown in industry credit growth is a probable event (it is estimated that if the increase in RMB loans in terms of financial data remains flat last year, the annual growth rate will drop 1 pct from 2023), but relying on regional resource endowments and more abundant capital strength, the credit growth rate of urban agricultural commercial banks is expected to continue to be higher than that of peers, making it relatively better to make up prices with volume. At the same time, these banks account for a higher share of long-term, high-cost deposits, which means there is more room for improvement in deposit costs this year, supporting a more stable trend in interest spreads (judging that Changshu, Ruifeng, Ningbo, etc. are expected to take the lead in stabilizing).

In the short term, high dividends are expected to be the darling of the capital market. Buying banks can still be defended:

Historically, there have been no big ups and downs in dividends from listed banks, and the certainty of earning dividends is also obvious; on the other hand, many dividend rates have also increased in recent years, and the sector's dynamic dividend rate is still close to 6%. If the economic recovery trend has not been established for a long time and there is no significant improvement in market sentiment, the banking sector can be actively allocated under strategic thinking. Compared to state-owned banks and some stock banks (with a dividend rate of over 30%), banks that have no bad burdens, maintain steady profit growth, and have the potential and ability to further increase dividend rates (in the Jiangsu and Zhejiang regions) deserve close attention.

Investment analysis opinion: Optimistic about banks. Due to the undervaluation, low positions, low expectations and high dividend characteristics of the banking sector, the bank believes that market capital is still the focus, but at this stage, it should focus on internal sector rotation and focus on high-quality urban agricultural commercial banks whose valuations are close to the average level of the sector. Individual stock level: 1) Prefer high-quality regional banks with fundamental support: Bank of Suzhou (002966.SZ), Changshu Bank (601128.SH), Sunong Bank (603323.SH), and Ruifeng Bank (601528.SH). 2) Stable dividend varieties can continue to be held, such as Shanghai Agricultural Commercial Bank (601825.SH), major state-owned banks, etc. 3) Closely track stock banks with absolutely low valuations and low holdings, such as Industrial Bank (601166.SH).

Risk warning: Physical demand has been sluggish for a long time, and the pace of economic recovery is lower than expected; interest spreads have stabilized less than expected; risk disturbances in some housing enterprises and risk exposure for long-tail customers has exceeded expectations.