The Zhitong Finance App learned that Guoxin Securities (Hong Kong) released a research report saying that the current valuation of the banking sector is low, subsequent performance growth is expected to be stable, and there is very little risk of a downward valuation. If the macroeconomic recovery continues to improve, it is expected to push for valuation repair in the banking sector and maintain the industry's “overrated” rating. Market expectations for policies and the economy will change in a favorable direction in the second quarter, but it will not be an environment for strong recovery. It is expected that the investment style will be balanced, and high-dividend individual stocks will continue to attract long-term, low-risk capital. In addition to major state-owned banks, high dividend strategies will continue to spread to small and medium-sized banks with stable fundamentals. It is recommended to focus on Chongqing Agricultural Commercial Bank (601007.SH), Zheshang Bank (02016), and Bank of Jiangsu (600919.SH).

In terms of individual stocks, it is recommended to lay out banks with excellent long-term prospects under the overall undervaluation of the industry, including China Merchants Bank (03968) and Bank of Ningbo (002142.SZ); second, it is recommended to recommend small agricultural and commercial banks with distinctive characteristics, such as Changshu Bank (601128.SH), which are mainly small, medium and micro customers; and third, for funds that pursue low volatility and absolute returns, it is recommended to focus on banks with high dividend ratios and stable dividend records.

Guoxin Securities (Hong Kong) views are as follows:

High dividend strategies have continued to dominate since 2023

Since 2023, due to factors such as macroeconomic recovery falling short of expectations, investors' risk appetite has continued to decline, and dividend strategies have continued to prevail. High-dividend bank stocks are favored by investors, and valuations continue to recover, while individual bank stock valuations with high growth and relatively high valuations continued to decline. This style continued until the beginning of February this year. The average ROE premium ratio of the high-growth representative combination (Bank of Ningbo, Bank of Chengdu and Bank of Changshu) selected by Guoxin Securities (Hong Kong) compared to the average ROE of the high-dividend representative group (five major banks) has increased in the past two years, but the average PB premium rate has converged from about 150% in early 2023 to about 40% in early February 2024. Since February, the premium rate has remained between 35% and 40%, and the style is balanced.

Sector Views: Optimistic about the absolute earnings of the banking sector in the second quarter

In terms of investment style, it is expected that market expectations for policies and the economy will change in a favorable direction, but the macroeconomy will not be an environment for strong recovery, and it is difficult to completely reverse the pattern of low risk appetite. Therefore, the banking sector, which has strong safe-haven attributes, can still be expected to reap absolute benefits. The manufacturing PMI recorded 50.8 in March, and the performance was quite strong; the PPI decline narrowed, and CPI achieved positive growth in February; fiscal strength was weak in the first quarter, and fiscal strength was expected to be positive in the second quarter. These signs indicate that China's economy may be better than previously expected. Furthermore, there are signs of a decline in US inflation. The market expects interest rate cuts in June. Improved overseas liquidity is conducive to boosting A-share valuations.

Considering the large increase in the dividend strategy in the early stages, Guoxin Securities (Hong Kong) believes that market risk appetite has been boosted in an environment where the economy is showing signs of exceeding expectations and overseas liquidity is improving. However, Guoxin Securities (Hong Kong) previously pointed out in “Understanding the Decline Growth and Differentiation of Deposits from the M2 Derivative Principle” that the core of boosting consumer consumption is to raise residents' income expectations, but currently the per capita disposable income growth rate and consumer spending tendencies of urban residents are still below the level before 2019. It is expected that it will be difficult for the market to form a consistent and optimistic outlook on domestic demand and that it will be difficult for the macroeconomy to form a strong recovery environment. For long-term low-risk capital, the high dividend strategy is still effective.

From a fundamental perspective, the first quarter of this year is expected to be the time of greatest pressure on banking performance. Focus on investment opportunities in the banking sector after the first quarter report. Net interest spreads in the banking sector were under strong year-on-year pressure in the first quarter. Negative revenue growth is expected to fall by 20 bps, 5-year LPR will drop by 10 bps, and banking loan repricing pressure will be strong in the first quarter of this year. At the same time, due to slow economic recovery, interest rates on new loans issued by financial institutions also dropped sharply. The weighted average interest rate for new loans issued by financial institutions was 3.83% in December 2023, down 31 bps year on year. It is expected that interest rates on new loans will continue to decline slightly in the first quarter of this year.

On the debt side, the trend of deposit regularization intensified in 2023. Judging from some listed banks that have already disclosed their 2023 annual reports, deposit costs of the vast majority of listed national banks have increased. A good start to this year's assessment tasks are heavy. In particular, with the year-on-year decline in new deposits in the first quarter, various banks have continued to step up their savings collection efforts, and it is expected that actual deposit costs will continue to face some pressure. In summary, under pressure on both sides of capital, net interest spreads in the banking sector are expected to narrow significantly year-on-year in the first quarter, and revenue growth is likely to be negative.

Guoxin Securities (Hong Kong) judged that after the first quarter of this year, the year-on-year decline in net interest spreads narrowed, and the pressure on banking performance eased. Net interest spreads in the banking sector fell to 1.69% in the fourth quarter of 2023, with large commercial banks falling to 1.62%. Maintaining a certain net interest spread is the foundation for the banking industry to continue to operate steadily. Protecting net interest spreads in the future is an important policy consideration. It is expected that there is limited room for loan interest rates to continue to decline, while continuing to guide the reduction of debt-side costs. Currently, the share of residents' personal time deposits has exceeded 70%. It is at a high level, and there is not much room for continued upward growth. At the same time, in the context of scarce assets, banks themselves will continue to decline in their willingness to collect savings at high interest rates, and they will continue to strengthen deposit liability management. As a result, the pressure on both sides of the banking sector was relieved after the first quarter, and the decline in net interest spreads is expected to narrow somewhat.

Stock selection strategy: high dividends are steady, and high growth is expected to generate excess returns

Based on the above analysis, Guoxin Securities (Hong Kong) judged that the market's expectations for policy and economy in the second quarter will change in a favorable direction, but it will not be an environment for strong recovery. It is expected that the investment style will be balanced, and high-dividend individual stocks will continue to attract long-term, low-risk capital. In addition to major state-owned banks, high dividend strategies will continue to spread to small and medium-sized banks with stable fundamentals. It is recommended to focus on Chongqing Agricultural Commercial Bank, Zheshang Bank, and Bank of Jiangsu.

For capital seeking excess returns, it is recommended to actively focus on high-quality banks in growing regions. Market sentiment has picked up marginally, and after the fundamentals of the banking industry have bottomed out, high-growth, high-quality bank stocks that are currently valued at a low level are expected to usher in a wave of rebound. Market risk appetite has continued to decline since 2023. In addition, net interest spreads and asset quality in the banking sector are facing greater downward pressure, and performance continues to decline. As a result, early valuations of high-growth banks all ushered in relatively large adjustments and fell to historic lows.

Guoxin Securities (Hong Kong) has always emphasized that macroeconomics is the core logic of bank stock investment. Market expectations for policies and the economy in the second quarter are expected to change in a favorable direction. In particular, pressure on banking performance will begin to ease after the first quarter. Therefore, Guoxin Securities (Hong Kong) believes that high-quality regional banks with low valuations are expected to be favored by capital seeking excess returns. The first is to suggest banks with excellent long-term prospects, including China Merchants Bank and Bank of Ningbo; the second is to recommend small agricultural commercial banks with a focus on small, medium and micro customer groups and distinctive characteristics, such as Changshu Bank and Bank of Suzhou.

Risk warning

If the macroeconomy declines sharply, it may affect the banking industry from various aspects such as net interest spreads and asset quality.