Ping An Securities: Increased holdings by China Investment Corporation boost market sentiment, continue to see value in banking sector allocation.

According to the information obtained from the Zhongtong Finance APP, Ping An Securities has released a research report stating that since the third quarter, the signals of stable growth policies have been continuously strengthened, which is expected to improve market expectations. Considering that the static PB ratio of the banking sector is only 0.55 times, corresponding to an implied NPL ratio of over 15%, the safety margin is still high. In addition, with the continuous decline in the risk-free interest rate, the attractiveness of bank dividend yields has been further highlighted, and attention should be paid to the allocation value of the sector as a high dividend asset. The recovery of residents' consumption propensity and risk appetite is still worth looking forward to, as it will become a catalyst for the profitability and valuation rebound of the sector. Individual stock recommendations include large and medium-sized banks with high dividend yields and high-quality regional banks with better growth prospects than their peers, such as Jiangsu (600919.SH) and Changsha (601577.SH), while also paying attention to the recovery process of retail banks.

Matters:

On October 11th, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank announced that Central Huijin Investment Ltd. has increased its holdings of A-shares by 27.61 million, 37.27 million, 24.89 million, and 18.38 million shares respectively, accounting for 34.7%, 40.0%, 64.0%, and 57.1% of the company's total issued share capital after the increase. Based on the closing price on October 11th, the amount of the increase in holdings of Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank reached 130 million yuan, 136 million yuan, 94 million yuan, and 117 million yuan, with a total increase of 477 million yuan.

▍Key points from Ping An Securities:

The increase in holdings by Central Huijin is conducive to boosting market sentiment, highlighting the defensive attributes of the banking sector.

Looking back at history, Central Huijin's increase in holdings of bank stocks generally occurs during periods of relatively low market sentiment. Taking the most recent two rounds of Central Huijin's increase in holdings as examples, whether it was the volatility caused by liquidity issues in the financial market in 2013 or the rapid decline in the A-share market in the second half of 2015, Central Huijin increased its holdings of the four major banks, which are representative of the weighted stocks.

From the short-term market performance after each increase in holdings by Central Huijin, although the market does not necessarily immediately reverse, the positive signals it conveys are still clear and helpful for the recovery of market sentiment. Especially in the banking sector, during the period of Central Huijin's increase in holdings, bank stocks have shown relatively obvious relative returns for the majority of the time, reflecting the defensive nature of the banking sector in a bear market.

The short-term pressure on fundamentals does not change the allocation value, and the attractiveness of sector dividend yields continues to increase.

Looking back at the historical trend of bank stocks since 2007, the outperformance of bank stocks mostly occurred during periods of economic improvement and rising interest rates, but it is not absolute. For example, the sector's market performance at the end of 2012 and the beginning of 2013, as well as in 2014, when the domestic interest rates were declining, especially the outperformance at the end of 2014, marked the beginning of a loose monetary policy cycle.

At the current point in time, due to the downward trend in financing demand and the continuous interest rate cuts, the short-term industry fundamentals are still suppressed. However, as a high dividend variety that can provide stable dividends, bank stocks also have allocation value similar to fixed-income products during the stage of continuous decline in risk-free interest rates. As of the end of September, the average dividend yield of the banking sector in the past 12 months was 5.76%, second only to the early stage of the bull market in 2014. The average dividend yield of the four major banks is above 6%.If we measure the risk-free rate with the 10-year government bond yield, the relative premium of bank dividend yield is at a historical high, and the attractiveness of dividends continues to increase.

Risk Warning:

1. Economic downturn leads to unexpected increase in industry asset quality pressure. 2) Interest rate decline leads to unexpected narrowing of industry interest spread. 3) Increased cash flow pressure of real estate companies leads to rising credit risks.