CITIC Securities: Rate cut meets expectations, a new round of deposit rate cuts can be expected

According to the financial news app Zhitong Finance, Zhongtai Securities released a research report stating that the interest rate cut meets expectations, with LPR linked to 7-day OMO, further deepening interest rate marketization. This 10bp LPR cut will have a 1bp impact on banks' interest margins in 2024, and a 0.5pcts/1.1pcts impact on revenue and pre-tax profits respectively. Looking at the recent adjustments in LPR and deposit rates: for every two LPR cuts by the central bank, major banks subsequently lower their benchmark deposit rates twice. With two interest rate cuts since the beginning of the year, a new round of deposit rate cuts can be expected.

Interest rate cut within expectations: Expectations of a US interest rate cut are rising, exchange rate constraints may weaken, and domestic economy still shows weak recovery. The domestic economy is still in a phase of weak recovery, with domestic interest rate cuts influenced by exchange rates and bank interest margins. On one hand, the exchange rate is constrained by the US-China interest rate differential, but with US CPI data for May-June falling below expectations, expectations of a US interest rate cut are rising. The US-China interest rate differential may gradually widen from its low point, easing pressure on the RMB exchange rate and reducing constraints on domestic interest rate cuts. On the other hand, the cost of liabilities for listed banks in 1Q24 decreased by 4bp compared to the previous period, the earlier deposit rate cuts have begun to show effects, and this moderate interest rate cut, coupled with previous manual interest adjustments benefiting the overall cost of liabilities in the banking industry, may have a certain easing effect on this interest rate cut.

LPR linked to 7-day OMO, further deepening interest rate marketization. While the MLF remained unchanged in July, this time both the 7-day OMO and LPR were cut by 10bp, and it is expected that the LPR will subsequently be anchored to the 7-day OMO rate. The MLF, as a policy rate, will gradually fade in color and effect, aligning domestic policy rates more closely with international standards, which is beneficial for a more market-oriented pricing of funds in the short term.

Reducing MLF collateral requirements to further balance the bond market supply and demand. This year, long-term bond yields have declined rapidly, with the central bank repeatedly warning about the risks of long-term bond rates. On July 1st, it announced that it would conduct national bond borrowing operations to increase bond market supply. Lower government bond yields may also lead to accelerated outflows of foreign capital, affecting the RMB exchange rate. Currently, there are few eligible bonds that meet the requirements for MLF collateral, and this temporary reduction in MLF requirements is a continuation of previous interventions in the bond market policy, helping to further balance the bond market supply and demand.

It is estimated that this 10bp LPR cut will have a 1bp impact on banks' interest margins in 2024, with impacts of 1.2/0.7/0.7/0.8bp on large banks, joint-stock banks, city commercial banks, and rural commercial banks respectively. The impact on banks' 2024 revenue is around 0.5pcts, and on banks' 2024 pre-tax profits is around 1.1pcts. In terms of revenue, the impacts on large banks, joint-stock banks, city commercial banks, and rural commercial banks are 0.6/0.3/0.3/0.4pcts respectively; in terms of pre-tax profits, the impacts are 1.3/0.7/0.7/0.8pcts for large banks, joint-stock banks, city commercial banks, and rural commercial banks respectively.

With two interest rate cuts since the beginning of the year, a new round of deposit rate cuts can be expected. Looking at the recent adjustments in LPR and deposit rates: for every two LPR cuts by the central bank, major banks subsequently lower their benchmark deposit rates twice. This adjustment on the liability side matches the downward adjustment on the asset side, while also opening up space for further downward adjustments on the asset side. Although the LPR has been cut twice since 2024, major banks' benchmark rates have not been lowered since 2024. Based on the above patterns, a reduction in benchmark deposit rates can be expected in the near future Investment Advice: Bank stocks have the characteristics of stability and defensiveness, as well as high dividend yields and the investment attributes of state-owned financial institutions; from an investment perspective, there is strong support for bank stocks, and the bank's fundamentals are stable, see the report: "Special Study on Bank Liquidity | Which Institutions are Driving the Rise and Fall of Bank Stocks?", and the annual strategy "Steady with Vitality - From Macro to Customer Groups, Customer Groups to Income". The fundamentals of high-quality city commercial banks are certain, choose city commercial banks with cheap valuations. Secondly, in the case of weak economic recovery and benefit from debt-to-equity swaps, choose large banks with high dividend yields. Thirdly, if the economic recovery expectations are strong, choose core assets in the banking sector.

Risk Warning: Economic downturn exceeds expectations; industry data calculation deviation risk; insufficient sample statistics leading to deviation from actual situation risk; the risk of information lag or untimely updates in the public information used in research reports