UBS: Stock banking performance is expected to improve significantly in the 3rd quarter

The Zhitong Finance App learned that Yan Meizhi, head of financial industry research at UBS Investment Bank in Greater China, said that despite a further slowdown in loan growth, the decline in net interest income may narrow due to the overall stabilization of net interest spreads. Fee revenue is likely to remain weak as regulators guide fee cuts, but trading and investment returns are likely to maintain good growth in the 3rd quarter (average increase of 30.4% year over year). Furthermore, given that there is limited room to further reduce credit costs, UBS expects that strengthening operating expense controls will support net profit growth. Overall, the stock bank's performance in the 3rd quarter is expected to improve even more significantly.

Stock banks and local banks seem to be more pro-cyclical. The trend is in line with the bull market, while state-owned banks are more countercyclical. UBS believes that in the next few years, the Chinese government will indeed be more willing to support the real economy and the stock market, which is expected to spawn slow bulls. Currently, due to some policy details still unclear, such as the intensity of fiscal stimulus and the uncertainty of the US election, it is believed that bank stocks will outperform in the H share/A share market, especially large banks. High dividend rates, “predictable” earnings, and undervaluation make domestic bank stocks still worth investing in.

Yan Mei predicts that the year-on-year growth rate of the covered state-owned banks in the 3rd quarter of 2024 may improve to a year-on-year decline of 1.9%, a decrease of 1.7%, and an increase of 0.4%, while the growth rate of local banks may drop to 3.1%, increase 4.1%, and increase 9.1% in the third quarter.

Thanks to lower financing costs and active asset restructuring, it is expected that the decline in net interest spreads of Chinese banks may narrow further. The third quarter is expected to drop 2 basis points from quarter to quarter and 15 basis points year on year (down 3 basis points from month to month in the second quarter, down 20 basis points year on year).

Looking ahead, Yan Mei said that the negative impact may be due to the reduction of interest rates on existing mortgages by about 50 basis points starting at the end of October, which may reduce net interest spreads by only 1 to 2 basis points in the fourth quarter of 2024. Most of the total impact of 5 to 6 basis points will be reflected in 2025, compounded by further downward pressure on LPR, but deposit interest rates will be lowered to offset this impact. Another downside risk may be banks' trading and investment returns, as large bond sales and financial redemptions may drag down MTM investment returns.

With the implementation of more measures to boost the stock market (including providing 500 billion yuan of swap facilities to non-bank financial institutions to provide liquidity for stock purchases), investment sentiment in the wealth management products and bond markets remains uncertain.