CITIC Securities: A new round of deposit rate cuts can be expected, providing strong support for investment in the banking sector

According to the information from Zhitong Finance APP, Zhongtai Securities released a research report stating that the interest rate cut is in line with expectations, with LPR linked to 7-day OMO, further deepening interest rate marketization. This 10bp LPR cut will have an impact of around 1bp on banks' interest margins in 2024, and impacts of 0.5pcts/1.1pcts on revenue and pre-tax profits respectively. From 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. Bank stocks have a stable and defensive nature, combined with high dividends and the investment attributes of state-owned financial institutions; from an investment perspective, there is strong support for bank stocks, with solid fundamentals. The fundamental certainty of high-quality city commercial banks is high, choosing undervalued city commercial banks.

Zhongtai Securities' main points are as follows:

Interest rate cut within expectations: the expectation of a U.S. interest rate cut is rising, exchange rate constraints may weaken, and the domestic economy is still showing signs of weak recovery. The domestic economy is still in a phase of weak recovery, with domestic interest rate cuts constrained by exchange rates and bank interest margins. On one hand, the exchange rate is constrained by the China-U.S. interest rate differential, but with U.S. CPI data for May-June falling below expectations, the expectation of a U.S. interest rate cut is rising, and the China-U.S. interest rate differential may gradually widen from a low level, easing pressure on the RMB exchange rate and weakening constraints on domestic interest rate cuts. On the other hand, the cost of liabilities for listed banks in 1Q24 decreased by 4bp on a month-on-month basis, the previous deposit rate cuts have already shown initial effects, and this interest rate cut is moderate. Additionally, the previous manual interest rate adjustments have a positive impact on the overall cost of liabilities in the banking industry, which may have a certain mitigating effect on this interest rate cut.

LPR linked to 7-day OMO, further deepening interest rate marketization. While the MLF remained unchanged in July, both the 7-day OMO and LPR were cut by 10bp this time, and it is expected that the LPR will subsequently anchor the 7-day OMO rate. The MLF, as a policy rate, will gradually fade in color and effect, domestic policy rates will gradually align with international ones, and anchoring to the short term is conducive to more market-oriented fund pricing.

Reducing MLF collateral requirements to further balance the bond market supply and demand. This year, long-term bond yields have declined rapidly, and the central bank has repeatedly warned of the risks of long-term bond rates. On July 1st, it announced that it would conduct national debt 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, and this temporary reduction in MLF requirements is a continuation of the previous intervention in the bond market policy, which helps further balance the bond market supply and demand.

Calculations show that this 10bp LPR cut will have an impact of around 1bp 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 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 Since the beginning of the year, interest rates have been cut twice, and a new round of deposit rate cuts is expected. From the recent adjustments in LPR and deposit rates: every time the central bank cuts LPR twice, large banks will subsequently cut their listed deposit rates twice. On one hand, the liability side adjusts to the asset side's cuts, while also creating room for further cuts on the asset side. Although LPR has been cut twice since 2024, listed deposit rates of large banks have not been cut since 2024. Based on the above pattern, a reduction in listed deposit rates can be expected in the near future.

Investment recommendation: Bank stocks have stability, defensiveness, 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 fundamentals of banks are stable. Quality city commercial banks have high certainty in their fundamentals, so choose undervalued city commercial banks.

Firstly, we continue to recommend Jiangsu Bank (600919.SH), Changshu Bank (601128.SH), Ruifeng Bank (601528.SH), Chongqing Rural Commercial Bank (601077.SH), Shanghai Rural Commercial Bank (601825.SH), Nanjing Bank (601009.SH), and Qilu Bank (601665.SH).

Secondly, in the case of weak economic recovery and benefits from debt-to-equity swaps, choose large banks with high dividend yields: Agricultural Bank of China (601288.SH), Bank of China (601988.SH), Postal Savings Bank of China (601658.SH), Industrial and Commercial Bank of China (601398.SH), China Construction Bank (601939.SH), Bank of Communications (601328.SH), etc.

Thirdly, if there is a strong expectation of economic recovery, choose core assets within the banking sector: Ningbo Bank (002142.SZ), China Merchants Bank (600036.SH), Industrial Bank (601166.SH).

Risk warning: Economic downturn exceeds expectations; risks of deviation in industry data calculations; risks of deviation from actual situations due to insufficient sample statistics; risks of information lag or untimely updates in publicly available data used in research reports