Since the end of 2023, the banking sector has bucked the trend through the market's high dividend style, with a cumulative increase of more than 13%, outperforming the performance of mainstream stock indexes and most sectors. Among them, the four major banks have repeatedly hit new milestones, and the joint-stock and urban commercial banks are also showing impressive gains.

Now, listed banks have begun to disclose their 2023 report cards. Some leading companies have fallen short of market expectations, and have begun to falsify the upward logic of steady growth in previous performance.

Everbright Bank is a typical example. A shares fell sharply by 9% in the last 5 trading days, and H shares plummeted 11% on the 3rd, devouring 2 months of gains.

Previously, the market chose high-dividend sectors to form groups, seeking nothing more than steady performance growth, high dividends, and defensive allocation against the backdrop of weak macroeconomic markets.

However, with the dividend sector rising all the way up, now it is time for performance to be realized, and we should be even more wary of investment risks after the dividend-style market skyrocketed.

01

Among the 42 A-share listed banks, CMB is a representative bank with excellent management, while Everbright is a representative bank with relatively ordinary operations. From the 2023 report cards of these two banks, you can get a glimpse of the overall performance of the banking industry.

In 2023, CMB's revenue was 339.1 billion yuan, down 1.6% year on year, and net profit to mother was 146.6 billion yuan, up 6.2% year on year. Revenue was negative for the first time in 14 years because all business lines experienced a decline in revenue, including a decline in net interest income and non-interest income.

Revenue declined, and profit increased. The reason for this is also very simple: by drastically reducing credit impairment losses, some profits were released.

Looking at Everbright Bank, revenue in 2023 was 145.69 billion yuan, down 3.9% year on year. Net profit attributable to mother was 40.79 billion yuan, a year-on-year decrease of 9%. Looking at it over a long period of time, negative annual revenue growth was rare; it only occurred in 2009, 2017, and 2022. This was the first time since listing in 2010 that there was a negative increase in profit due to the mother.

Looking at the single-quarter split, revenue for the fourth quarter fell 2.6% year on year, and the decline was significantly narrower than -8% in the third quarter. However, net profit to mother fell sharply by 62% year on year and 77% month on month. Mainly due to the 67.9% year-on-year increase in asset impairment losses in the fourth quarter, or due to pressure on the asset quality of credit cards and consumer loans.

Looking at net interest spreads, CMB and Everbright were 2.15% and 1.74% respectively in 2023, down 25BP and 27BP from 2022, hitting new lows since 2005 and 2017.

Net interest spreads are one of the most important indicators of a bank's profitability. The sharp decline in this indicator indicates that the main credit business is facing quite a few challenges. On the asset side, due to stock mortgage interest rate adjustments and multiple LPR cuts, loan yields declined significantly, and yield on interest-bearing assets recorded poor performance. On the debt side, the continued regularization of deposits and rising interbank financing costs led to an increase in overall debt costs.

Among non-interest income, both banks experienced double-digit declines in net processing fees and commission income. Furthermore, CMB's escrow funds, financial management, and trusts all declined by about 20%, while insurance income increased by 9.3%. However, since the third quarter of last year, insurance pricing has been lowered, and new regulations have been introduced. Universal Insurance interest rates will be further reduced to less than 3%, and processing fees for banks will be further reduced. In 2024, this revenue will face major challenges.

However, in terms of other non-interest income, both banks increased by more than 22% year on year, stemming from the bull market in the Chinese bond market, which greatly boosted investment income and hedged the overall non-interest income performance.

CMB's non-interest income has been declining for 2 consecutive years, putting some pressure on the bank's asset-light and large wealth management strategy. Previously, the market gave CMB a higher valuation premium. One of the reasons was that it valued CMB's wealth management and thought it could be a small engine for overall business growth. Now, this expectation needs to be revised.

Let's take another look at asset quality. The non-performing loan ratio, the recruitment rate was 0.95%, and Everbright was 1.25%. The performance was relatively stable. The provision rate for non-performing loans was 437.7%, a year-on-year decrease of 13%. This is the second year in a row that CMB has declined. It can be seen that operating pressure is not small, and it is necessary to release previously hidden profits by appropriately reducing provision coverage.

Everbright's provision rate was 181.27%, down 6.66% from 2022. This absolute value ranks in the bottom of the 42 listed A-share listed banks, and there is a huge gap between the performance of CMB and CMB.

The latest financial results of the two banks clearly reflect the operating pressure on the banking industry. In fact, judging from the listed banks that have already disclosed financial reports, they are really not that optimistic.

For example, the profits of major state-owned banks such as ICBC and the Bank of China increased by less than 1% year on year, the profits of the Agricultural Bank and the Bank of China all increased by less than 4%, and SPD Bank's profit fell sharply by 28.3% year on year.

02

Over the past 2-3 years, due to the continuous correction of the general market growth style led by the Shanghai and Shenzhen 300, market risk appetite declined sharply, so much so that the main capital group formed a dividend sector and went against the market and emerged from a wave of super markets.

Even though it bucked the trend by so much, the overall valuation didn't seem high. According to data, the latest PE in the China Securities Dividend Index was 6.84 times, below the median of 7.15 times since 2018. The latest PB is 0.73 times, which is also far below the median of 0.86 times since 2018.

Based on the valuation perspective, many people believe that the dividend style sector still has a lot of room for valuation repair, and they have high expectations for the future market of dividend stocks. However, judging from the performance disclosed by banks, we also need to be alert to the investment risks involved.

Looking at the valuation multiples as a whole, it doesn't reflect the real situation of the dividend style very well. Looking at the layout of the China Securities Dividend Industry, there are 17 bank constituent stocks, accounting for 19.8% of the total weight. Next is coal, which has 14 constituent stocks, accounting for 18.6%. Next is transportation, accounting for 12.38%.

Banks account for a high share of weight, but since 2018, valuations have been in a volatile downward trend, falling back from 1.2 times the highest to 0.57 times today, significantly lowering the valuation multiplier of the dividend index.

From a fundamental point of view, the expectations given by the market are very high, but the actual performance may not be that optimistic.

First, let's look at banks. The overall profit of the industry will be under considerable pressure in the future. In terms of the main credit business, the scale of credit has slowed along with the slowdown in economic growth, and net interest spreads have also continued to narrow. Furthermore, the credit structure has also undergone profound changes. The real estate business, which used to be a high-quality asset with a high share of credit and high interest spreads, is a thing of the past. Due to various factors, the growth rate of the bank's main business will tend to decline. The wealth management business, which has been given high hopes, is actually quite difficult to carry the banner of overall business growth due to factors such as large capital market fluctuations and falling rates on consignment channels.

Let's look at coal again. The past few years have reaped huge dividends from supply-side reforms. The coal price center has risen upward, and profitability has continued to increase. However, we need to clearly understand that this dividend cannot continue, because the goal of new energy, including photovoltaics and wind power, is to gradually eat up the market share of traditional energy. In the foreseeable future, coal will return to its traditional role as an industry from its current “emerging” role.

Recently, coal leader Lu'an Huanneng once collapsed nearly 30% in more than 10 trading days, but previously soared more than 400% in just a few years. According to the 2023 Earnings Report disclosed on March 23, both net profit and net profit deducted from non-net profit fell by more than 40% year on year, causing stock prices to collapse continuously. Lu'an Huanneng's performance once again sounded a wake-up call for the high-interest dividend sector in the market.

Let's look at transportation again. Tolling on expressways is a good business. It is similar to operating a hydropower station. After it was put into the power plant in the early stages, it was a steady stream of money printers in the later stages, and there was basically no compensation. Based on its good business model, high-speed high-quality leaders are also sought after by the market and continue to reach new highs. In the current performance disclosure period, there are also landmines.

In the last 5 trading days, Zhejiang Shanghai-Hangzhou-Ningbo plummeted 16%. The trigger stemmed from the 2023 report card that was just revealed. Net profit to mother increased by only 0.87% year over year, and dividend distribution fell short of market expectations. According to the annual report, Zhejiang Shanghai-Hangzhou-Ningbo distributed HK$0.35 per share, a decrease of about 15% compared to 2022. Dividends that used to be high have now been reduced, so the capital market naturally votes with their feet.

Whether it's Everbright Bank, Lu'an Huanneng, or Zhejiang Shanghai—Hangzhou—Zhejiang, their performance has cooled down the market's previous strong expectations. Meanwhile, the coal sector, which had previously seen the highest increase, has recently retreated sharply by nearly 10%.

03

After 3 years of severe market crackdown, investors' preferences for growth styles have reached a freezing point, and no one cares about it. The dividend style, on the other hand, enjoys the same group market as the previous growth style, and there is quite a kind of fanaticism that regards it as a growth stock.

The PE value of the larger market, led by coal, electricity, and banks, is 7.7 times higher than 48.6% of the valuation fraction since 2018, higher than 22.2% of the market growth fraction and 42.7% of the small market growth fraction. We need to prevent the risk of changing market styles against the backdrop of macroeconomic improvements and the Fed's interest rate cuts.

Everything is a cycle. To invest, we must trust the cycle and respect the cycle.