According to a research report released by SWHY obtained by the Wisdom Wealth APP, regardless of whether it's the monetary drive under the low dividend, low volatility strategy or the fundamental changes in profit stability and marginal improvement, the bank sector will gain relatively significant absolute and relative returns throughout the year, and should be actively allocated at this point in time. Economic data remains in the consolidation phase, policies are clearly shifting to encourage upward economic movement, and searching for high-quality, high-dividend, or stocks with relatively attractive profit and better chip structure among the oversold stock-based banks based on low valuations.

Regarding the target: 1) continue to hold high-quality regional banks and long-term top-performers: Bank of Suzhou (002966.SZ), Jiangsu SuZhou Rural Commercial Bank (603323.SH), RuiFeng Bank (601528.SH), Changshu Rural Commercial Bank (601128.SH) (exhibiting α properties); 2) moderately increase allocation of undervalued, high dividend, high-quality banks: Industrial Bank (601166.SH), Bank of Communications (601328.SH) at this stage.

Shenwan Hongyuan's main points are as follows:

It's expected that the interim reports for listed banks will still face pressure on revenue and profit performance, with slight negative growth, but the possibility of significantly lower-than-expected results is very low.

SWHY said that from the annual rhythm perspective, it's predicted that the bank's profit and loss statements are likely to see marginal improvements in the second half of the year, with performance growth gradually moving towards positive growth. Based on tracking key listed banks and model forecasts, it's estimated that the year-on-year revenue growth rate of listed banks in 1H24 is approximately-2%, which is consistent with the first quarter, and the yoy decrease in net income attributable to the parent shareholders will narrow to 0.2% (1Q24: -0.8%).

When looking at different types of banks, high-quality regional banks will maintain their industry leadership in terms of performance, but attention will also be paid to some stock-owned banks that have improved from the bottom: State-owned banks are expected to experience a year-on-year decrease in revenue and net income attributable to parent shareholders of 1.9%/1.3%, a slight improvement from the first quarter; among stock-owned banks, the year-on-year growth rate of revenue and net income attributable to parent shareholders are -3.5%/0%, and only Industrial Bank, CITIC Bank, and Zhejiang Merchant Bank maintained a positive revenue growth trend, with particular focus on the profit and loss statements of oversold stock-based banks that are expected to improve in the latter half of the year or in Q3. High-quality city and rural commercial banks are still the focus: it's predicted that revenue for these banks will increase by 4%/2% year-on-year, and with stable revenue growth combined with a relatively solid provision for bad debts, the performance growth of these banks will be significantly ahead, with a calculated increase in net income attributable to the parent shareholders of 8.8%/2.8% for city and rural commercial banks, respectively. Among these banks, those such as Bank of Suzhou, Ruifeng Bank, and Jiangsu are expected to maintain a double-digit performance growth rate.

Compared with the first quarter report, non-interest income for listed banks in the second quarter remained stagnant, mainly due to the fact that the proxy business still needs to digest negative disturbances such as fee reductions, coupled with other unsustainable high-level growth related to debt investment in the bond market. On this basis, it tends to focus on the marginal changes in interest income, especially for stock-based banks that gradually re-price long-term, high-interest rate demand deposits that mature, and for which manual interest supplementation is halted in the second quarter as well as for which the policy environment of the central bank breaks away from the "sole credit increment theory," more attention should be paid to the positive factors of quantity and price:

Fully adapting to the new period and new pattern, the growth rate of credit will naturally and inevitably fall, and credit growth should be both stable and practical.

As of the end of June, RMB loans under the social financing scale had increased by 8.3% year-on-year, slowing down by about two percentage points from the end of 2023, estimating that the loan growth rate for the year will be around 8.9%, and the new RMB loans in the first half of the year were CNY 12.5 trillion, which was less than the same period of the previous year, increasing CNY 3.1 trillion. Assuming that the full year's new loans will be CNY 21 trillion, with new loans in the first half of the year accounting for about 60% of the full year, it's basically holding steady with the average level from 2019 to 2023. In terms of structure, net bill reduction exceeded CNY 34 billion from January to June (on average, this period saw an increase of nearly CNY 72 billion from 2019 to 2023 of the same period), and enterprise medium and long-term loans increased by less than CNY 1.6 trillion year on year, which is also related to banks taking the initiative to reduce surplus liquidity. By analogy with listed banks, the credit distribution of listed banks in the second quarter is expected to show the characteristics of "slower overall quantity and greater structural practicality." It's estimated that the loan growth rate will generally slow down, with some banks experiencing year-on-year declines in loans; however, proactively suppressing bills and lowering the interest-free pricing for credit distribution will also help stabilize the performance of interest rate spreads.

At the same time, weak demand objectively exists, and the second quarter has not yet shown a clear recovery. The slowing down of infrastructure growth has directly affected the growth of medium and long-term loans for enterprises (the cumulative investment growth rate of infrastructure from January to May was further slowed down by more than 2 percentage points compared with the end of the first quarter). Although the fixed asset investment growth rate of the manufacturing industry maintained more than 9%, it is expected to be related to equipment renewal policy, and the investment and reproduction demand of real enterprises is still waiting to be released. The total increase of household operating loans and short-term loans for enterprises of SWIFT system from January to June 2024 is nearly CNY1.4 trillion less than the same period last year (accounting for nearly 60% of the year-on-year decrease in industry loans), and the demand of small and micro customers still needs to be improved, which is confirmed by the continuously low PMI of small and medium-sized enterprises below the boom-bust line. The growth momentum of retail loans is obviously insufficient, and it is expected that banks will optimize the credit structure of the retail loans in the second half year, which will definitely move some of the retail loan quotas to public (the net decrease in short-term consumption loans of residents from January to June is nearly CNY40 billion, which is nearly CNY120 billion less than that of the same period last year; the net increase in medium- and long-term consumption loans of residents has rebounded since the implementation of the new policy on May 17, 2024, but the accumulated increase since the beginning of the year is only about CNY19 billion less than the same period last year).

SWHY believes that stable and effective investment is the prerequisite for revenue to stabilize earlier and perform better than the industry. We focus on banks that have a more solid footing on the asset end and stable investment in public products, have a good quality track, and have more sufficient credit reserves (excluding large banks, such as ZTE in the joint stock bank); also include excellent small and medium-sized banks that have cultivated high-quality areas, have better credit prosperity in their regions than the whole country, and have been deeply cultivating real entity customers for many years.

2) The trend of downward interest rate differential is hard to reverse, but it is judged that listed banks' interest rate differential will decrease by 2bps quarter-on-quarter in the second quarter, and the decline rate will converge again year-on-year, among which there will also be banks that will achieve the stabilization trend of flat or slight increase on a quarter-on-quarter basis.

Taking into account the repricing, the downward adjustment of mortgage interest rate, and the improvement of deposit cost (including the regularization), the judgment in the strategy report on the year-on-year decline of listed banks' interest rate differential by 10-15bps in 2024 is maintained. Among them, the decline of 13bps in 1Q24 compared with 2023 has been achieved. Under the condition that LPR is no longer further reduced, it is expected that the additional decrease in the interest rate differential within the year will be limited.

From the perspective of liabilities, the effect of suspending manual interest supplement on banks' interest rate differential is more obvious; together with the gradual repricing of existing deposits and the optimization of deposit structure, the improvement of liability cost will still be expected. In April, the self-discipline mechanism for deposit interest rates was released to prohibit the proposal of manual interest supplement for public current deposits. For banks with obvious deviation of public current deposit interest rate from listed quotation (0.35% for state-owned banks/0.45% for other banks), assuming that they lower their over-self-discipline pricing to the upper limit of the agreed deposit pricing (1.25% for state-owned banks/1.35% for other banks), and considering that some deposits are transferred to time deposits, it is estimated that the standardized manual interest supplement will directly boost the interest rate differential of banks by 3bps, of which joint stock banks can boost about 4.6bps.

At the same time, controlling liability costs has become the "consensus" of banks to maintain their interest rate differential. The improvement of liability cost will still be expected to be gradually released from 2024 to 2026, which includes the annual expiration of all long-term deposits that will lead to repricing. It is estimated that it will increase the interest rate differential of banks by nearly 30bps.

From the asset side, the loan rate in the first half of the year continued to weaken, most of which absorbed the impact of previous stock policies. The subsequent trend will largely depend on the pace of real demand recovery. Since the beginning of the year, the loan rate has continued to decline year-on-year, which cannot be separated from the impact of previous policies on loan pricing, including the adjustment of LPR for 5 years, the reduction of stock mortgage interest rates, the reduction of provident fund interest rates, and the debt-to-equity swap, which is estimated to drag down the interest rate differential of listed banks by 18bps year-on-year in 2024. From a month-on-month perspective, the loan rate is still difficult to stabilize, mainly due to weak effective demand. Based on this, although the space for further decline in interest rates within this year is limited, the turning point from "slow decline" to staged "no decline" essentially depends on economic performance.

Even if the interest rate cut is landed again, the core contradiction is not how much the interest rate differential will decline, but whether the economic expectation will substantially improve. If a series of policy punches can reasonably boost effective reproduction and reinvestment demand, it is more crucial for banks to make up for the price by quantity and support revenue.

The stability of asset quality is a high-probability event. The probability of unexpected bad debts under forward-looking risk control is extremely small, but the pace of non-performing asset disposal between quarters may lead to some fluctuations in forward-looking indicators. It is expected that the industry's bad debt generation rate will rise, but the overall situation will remain stable. High provisioning is still the "core reserve force" for maintaining asset quality, stabilizing performance growth, and supplementing internal capital. It is expected that the non-performing loan ratio of listed banks in the second quarter 2024 will remain at 1.25% quarter-on-quarter. Listed banks will pay attention to the possibility of gradually reducing loans in the second quarter, and combined with the continued increase in risk disposal efforts in key areas such as real estate and credit cards, the bad debt generation rate may rise, but the magnitude will be limited (for example, the annualized bad debt generation rate of listed banks in 1Q24 is about 0.58% after adding back write-off recovery, which is 1bp higher than that of the whole year of 2023 and 4bps higher year-on-year). On this basis, it is expected that the provisioning coverage ratio of listed banks will fall back by 2.8 percentage points to 241% on a month-on-month basis.

SWHY believes that considering the relatively slow pace of real estate non-performing disposal, it is not ruled out that some banks' non-performing indicators may fluctuate temporarily, but the current bank's book asset quality is more realistic, and the relatively solid provisioning basis (the loan-to-provision ratio is at a high level in nearly ten years) can also ensure the smooth transition of asset quality. This year, the scissors gap between bank revenue and profit growth has tended to converge. From the perspective of asset quality, we will continue to focus on banks with sufficient provisioning bases, sufficient write-off resources but not consumed too quickly, and low non-performing indicators, whose asset quality will continue to outperform their peers in this cycle.

Risk warning: long-term sluggish real demand, economic recovery pace lower than expected; interest rate differential stabilization is lower than expected; some real estate risks and long-tail risks are exposed more than expected.