China Merchants Securities: The banking industry's 2024 annual report is resilient and suggests adhering to long-term principles and balanced allocation

The Zhitong Finance App learned that China Merchants Securities released a research report saying that as of March 28, a total of 23 42 listed banks had disclosed their annual reports, including 6 state-owned banks, 8 stock banks, 3 urban commercial banks, and 6 agricultural commercial banks. In addition, 12 banks that had not disclosed their annual reports had disclosed express reports. In choosing bank targets, considering differences in style in the short, medium, and long term, it is recommended to adhere to the long-term principle and balanced allocation. Among the three segments of state-owned banks, stock banks, and regional banks, each select a bank with an excellent valuation from the perspective of free cash flow of 20%, which itself will also achieve a balanced allocation of dividends, recovery, and growth.

The main views of China Merchants Securities are as follows:

Listed banks' performance continues to improve marginally in 2024

The year-on-year growth rates of revenue, PPOP, and net profit of the 23 listed banks were -0.6%, -1.6%, and 1.8%, respectively, with changes of +1.0pct, +1.2pct, and +1.0pct from 24q1-3; 24Q4 single-quarter revenue, PPOP, and net profit to mother grew by +0.8%, 0.04%, and +3.2%, respectively, compared with 24q3, +3.7pct, +4.4pct, and +2.2pct, respectively. In terms of individual stocks, the absolute performance growth rate of high-quality regional banks is relatively good.

From a performance-driven perspective

In 2024, the expansion of the credit squeeze from listed banks slowed down. Interest rate cuts and fee cuts put pressure on interest spreads and middle income, but profit growth remained resilient. On the one hand, surges in the futures market due to falling interest rates contributed to other non-interest rate increases; on the other hand, they benefited from bank provisions and backfeeds with excellent asset quality.

Looking ahead to 2025

It is expected that the pressure on bank interest spreads will ease, and intermediate income is expected to improve, but after the unilateral downward trend in bond market interest rates ends, other non-interest increases that contribute to normal surges in the bond market will be unsustainable. At the same time, provision for backfeeding will also subside due to the unfinished negative retail exposure. Therefore, after combining positive and negative contributions, it is expected that the overall performance growth rate of listed banks will continue to be resilient in the 25th year, and the performance growth rate is expected to be comparable to 2024.

investment strategy

In the first three quarters of 2023 and 2024, the nominal economy and profit growth rate declined, and the banking sector clearly outperformed the market thanks to resilient performance and high dividend characteristics. Within banks, the high dividend factor also clearly dominates. After 924 in 2024, economic and capital market sentiment picked up, recovery and growth factors gradually prevailed, banks' comparative advantage converged, and internal sector dominance factors gradually diverged.

Looking forward to the future

In the short term, after a period of rise, the market has entered a period of turbulence, the external environment is uncertain, the banking sector's defensive advantage in relative valuation and dividend levels has once again improved, and high-dividend banks are expected to run out of relative returns once again. In the medium term, uncertainty in the external environment will increase the continuity and strength of domestic policies to a certain extent. This will benefit the central increase in nominal GDP growth. This means that recovery banks will have certain policy hedging options. In the long run, the ROE, performance growth rate, and dividend rate of the listed banking sector are higher than the overall market, while the valuation is lower than that of the entire market. An earlier undervaluation means a high return after the fact. Moreover, as the future public fund evaluation system pays more attention to long-term performance and actual profit effects, it is expected that the banking sector with high sharp and long-term annualized returns will benefit from the rearrangement of institutional styles, which will facilitate the convergence of discounts and valuation restoration in the banking sector. Therefore, at this stage, the bank is optimistic about the short, medium and long-term absolute returns and relative returns of the banking sector.

Risk warning: financial concessions, narrowing interest spreads, economic recovery falling short of expectations, deterioration in asset quality, etc.