The Zhitong Finance App learned that Zhongtai Securities released a research report saying that the economy determines banks' stock selection logic, that weak and strong economic recoveries correspond to different target varieties, and bank stocks have steady and defensive attributes. First, the fundamentals of high-quality urban agricultural commercial banks are highly deterministic; choose urban agricultural commercial banks with cheap valuations. We continue to recommend Bank of Jiangsu (600919.SH), which benefits from regional beta, has strong ability to manipulate various assets, and is driven by the consumer finance troika to make up for interest differences. Changshu Bank (601128.SH) relies on a basic market with small and micro characteristics. It is small and diversified. It is less affected by chemical bonds and stock mortgages, and maintains excellent asset quality. Rui Fung Bank (601528.SH) is deeply involved in small and micro inclusion and retail transformation. It is based in Shaoxing, which has a developed private economy, and has strong regional economic certainty.

Second, the economy is recovering weakly, benefiting from debt conversion. Large banks are selected: Agricultural Bank (601288.SH), Bank of China (601988.SH), ICBC (601398.SH), CCB (), etc.). 601939.SH Third, expectations for economic recovery are strong, and core assets among banks were selected: Bank of Ningbo (002142.SZ), China Merchants Bank (600036.SH), and Bank of Ping An (000001.SZ).

The main views of Zhongtai Securities are as follows:

State-owned banks' profits all achieved positive growth throughout 2023. Interest spreads and revenue pressure are expected to increase after the statements are dismantled; at the same time, asset quality, high provision, and sufficient capital guarantee their stability. 1. Revenue of the six major banks was -0.6% YoY (-0.4% YoY in 3Q23); net profit was +2.1% YoY (+2.5% YoY in 3Q23). The profits of the six major banks all achieved positive growth. The increase in scale was the main contribution, and interest spreads were the main drag. 2. The asset quality stock burden is small, and the negative pressure on new students is low: the bad generation rate decreased by 12 bps year on year, and the bad rate remained stable from month to month; the loan ratio of major banks was 3.12%, down 4 bps from month to month. 3. The core Tier 1 capital adequacy ratio increased by 25 bp to 11.97% month-on-month;

Decomposition of revenue and profit growth rate: revenue -0.6% YoY, net profit +2.1% YoY; mainly driven by scale. 1. Revenue situation: -0.6% year over year, in line with expectations, driven by high scale growth; Bank of China Post Storage maintained positive growth. The year-on-year revenue growth rate fell 0.2 points from the 3Q23 margin. The negative factors were mainly the increase in the decline in interest spreads; the positive factors were mainly scale growth and net other non-interest. The growth rate of postal storage and agricultural banks increased marginally. 2. Net profit situation: +2.1% year-on-year; co-driven by scale and provision; Agricultural Bank has the highest growth rate. All six major banks achieved positive profit growth. The growth rate was distributed at the level of 0-4%, with the Agricultural Bank having the highest growth rate (3.9%). The year-on-year growth rate was down 0.4 points from the 3Q23 margin, and the Bank of China's growth rate was marginally up 0.8 points.

Net interest income breakdown: YoY and month-on-month. 1. Net interest dismantled year on year: net interest was -2.5% year over year, marginal decrease of 0.6% year on year; postal storage and the Bank of China maintained positive growth, and the agricultural bank's growth rate improved slightly. The annualized net interest spread fell 27 bps year on year, being dragged down by the balance and liability side, slightly wider than the 3q23 margin of decline by 1 bps. The Bank of China mainly benefited from overseas interest rate hikes, which increased 22 bps year over year. Deposits continued to be regularized throughout the year. Interest rate on interest-bearing debt increased by 18 bps year on year, the increase narrowed marginally by 3 bps, and the postal bank interest payment cost decreased by 6 bps year on year. 2. Net interest decomposition: net interest income -4.6% month-on-month. Asset size +2.1% month-on-month, net interest spread -10bps month-on-month. The asset-side yield breakdown is expected to be dragged down by both structure and pricing: the share of public and notes increased, and the share of retail sales declined; LPR continued to be lowered in August and the stock mortgage reduction was implemented in October. Debt-side cost breakdown: It is expected to be mainly a drag on deposit regularization: the share of corporate balances fell 1.6 points, personal balance remained flat, and corporate and individual regular periods increased by 0.5 1.1 points respectively.

Net non-interest revenue breakdown: +8.7% year-on-year (up 6% year-on-year in the 3rd quarter), handling fees remained negative, and other non-interest income remained high. 1. Net fee revenue increased by 2%, marginally 0.6 points wider than the 3Q23 decline. The Bank of China increased 5.3% year over year, widening the increase by 1.6 points. 2. Net other non-interest income was +49.9% year-on-year, 16.9 points wider than 3Q23. This is due to the low base of fluctuations in the bond market last year.

Asset quality analysis: Overall stability; low negative pressure on new students. 1. Net generation rate of bad products: The net generation of bad products in major banks decreased year-on-year and month-on-month, and the negative generation pressure decreased marginally. The cumulative annualized bad generation rate was 0.42%; the Agricultural Bank had the lowest rate of 0.34%. Looking at the improvement trend, the cumulative annualized bad generation rate of the six major banks decreased by 4 bp month-on-month compared to 3q23 and 12 bp compared to 4q22. The biggest year-on-year improvement in transactions was 25 bp. 2. Defect rate: The defective rate remains stable, and the stock burden is small. The overall defect rate was 1.3%, which remained stable from month to month, with a year-on-year decrease of 3 bps. The Postbank maintains the lowest defect rate. The six major banks all showed varying degrees of improvement over the same period last year. 3. Proportion of concerned categories: The share of concerned categories increased by 4 bp compared to 1h23 (expected to be affected by the new regulations) to 1.71%, an improvement of 1 bp compared to the end of '22, and future negative pressure is limited. CCB and the Agricultural Bank improved by 6b and 2bp, respectively. ICBC, CCB, and Agricultural Bank improved by 10 bps, 7 bps, and 4 bps, respectively. 4. Overdue situation: The overall overdue rate of major banks increased slightly in 2023. The overdue rate was 1.14%, an increase of 4 bps over the previous year, and an increase of 6 bp over 1H23, but the overall level remained low. Among them, the Postbank and Bank of China improved by 4 bp to 0.91% and 1.06% respectively.

Provisioning analysis: There is still room to free up. The provision coverage margin decreased by 2.86 points, up 1.36 points from the previous year to 240.36%, and the overall safety margin was high. The postal bank was 347.56%, the highest of the six major banks, followed by the Agricultural Bank at 303.87%. The 4Q23 loan ratio of major banks was 3.12%, down 4 bps from month to month. There is room to release profits: As asset quality improves, both risk costs and credit costs have declined.

Others: 1. Cost-to-revenue ratio increased year-on-year: revenue side growth slowed down; expenses declined marginally. 2. The core Tier 1 capital adequacy ratio of major banks in 4q23 increased by 25 bp month-on-month to 11.97%, close to 12%, and capital was further consolidated. The operating behavior was 13.72%, and the month-on-month increase was 33 bps. The absolute value and improvement range were the highest.

Investment advice: The economy determines the bank stock selection logic. Weak and strong economic recovery correspond to different target varieties, and bank stocks have steady and defensive properties. First, the fundamentals of high-quality urban agricultural commercial banks are highly deterministic; choose urban agricultural commercial banks with cheap valuations. We continue to recommend Bank of Jiangsu, which benefits from regional beta, has strong ability to manipulate various assets, and is driven by the consumer finance troika to make up for interest differences. Changshu Bank, which relies on a basic market with small and micro characteristics, is small and diversified. It is less affected by chemical bonds and stock mortgages, and maintains excellent asset quality. Ruifeng Bank, which is deeply involved in the transformation of small, micro and retail, is based in Shaoxing, which has a developed private economy, and has strong regional economic certainty. We also recommend Chongqing Agricultural Commercial Bank, Shanghai-Agricultural Commercial Bank, Bank of Nanjing, and Qilu Bank. Second, the economy is recovering weakly, benefiting from debt conversion. Large banks are selected: Agricultural Bank, Bank of China, Postbank, ICBC, etc.) Third, expectations for economic recovery are strong, and core assets among banks were selected: Bank of Ningbo, China Merchants Bank, and Bank of Ping An.

Risk warning events: Financial supervision exceeds expectations; research information is not updated in a timely manner, etc.