The scope of bank dividends is gradually expanding from state-owned large banks to some small and medium-sized banks. The cash dividend ratio of state-owned large banks remains stable, and some small and medium-sized banks also have characteristics such as low valuation and stable cash dividend ratio, with excellent fundamentals or in a period of improvement. Against the backdrop of slowing balance sheet expansion and reduced capital consumption, banks may be able to continue to maintain a high dividend payout ratio.

Since 2024, the rise in bank stocks can be considered from two aspects. First, the downward trend of risk-free interest rates continues the dividend logic; second, as annual performance is gradually disclosed, some banks have performed well or have repaired market expectations. Nevertheless, the PB of banks has only been repaired to the current level of 0.56 times. In the first quarter of 2024, the industry's net interest margin fell to 1.54%, but the year-on-year decline has narrowed. 2024 may be the year when bank performance bottoms out, and if performance gradually recovers, valuation is also expected to rise.

Advertisement

Behind each round of bank sector trends, there is often a fluctuation in nominal GDP growth. If the GDP growth expectation is expected to stabilize, the index is more likely to rise; if the expectation is still under pressure, it is difficult to have a significant index rise. Looking ahead, the current round of real estate optimization policies may have a certain stimulating effect on the economy.

From a fundamental perspective, the narrowing of the interest spread and the pressure on intermediate business income are the main reasons for the pressure on bank performance in 2023. In 2024, focus on the improvement of liability cost, and revenue may still have small fluctuations within the year, thus extending the bottoming period of performance. However, the performance of some high-quality regional banks is stronger.

The bank's net interest margin may bottom out within the year. From the asset side, against the backdrop of the LPR cut, the asset side pricing may still maintain a downward trend. On the one hand, the pricing of new loans continues to decline, and on the other hand, some of the existing loans involve repricing, but the impact is expected to be mainly concentrated in the first three quarters of 2024.

Liability cost optimization has become an important tool for net interest margin control. Regulatory measures include four adjustments to deposit挂牌 rates since 2022 and the suspension of "manual interest supplementation" in April 2024; at the bank level, some banks have stopped selling long-term large-denomination certificates of deposit, and the effect of saving liability costs is expected to gradually appear.

The suspension of "manual interest supplementation" and the reduction of deposit rates may lead to a certain rebound in the scale of wealth management, but the agency fee rate is expected to continue to decline. First, the agency fee rates for funds and wealth management have declined; second, the fixed-income product fee rates preferred by residents are relatively low, and the structure also drags down the fee performance.

The contribution of other non-interest income to revenue may slow down quarter by quarter: first, the bond market itself has uncertainty; second, some banks have disposed of bonds in the first quarter to release investment floating profits; third, regulatory guidance for regional banks to return to their main business may lead to a decrease in the financial investment strength of banks.

In terms of asset quality, the risk of personal loans has increased slightly, and the non-performing loan ratio of corporate loans continues to decline. The rise in the non-performing loan ratio of the retail end is mainly reflected in the significant increase in the non-performing loan ratio of credit card loans and personal business loans in 2023, but the duration of such assets is relatively short, and the exposure and disposal pace of existing risks are faster. Although the non-performing loan ratio of housing mortgage loans with long duration and collateral has also fluctuated, it remains at a low level.The non-performing loan (NPL) ratio for corporate loans continues to trend downward, although the risks associated with real estate inventory are still being exposed. However, the trend suggests that the marginal increase in the corporate real estate NPL ratio in 2023 has been relatively slow. Additionally, the pace of risk exposure and disposal varies among different banks, with some banks having already passed the peak in their corporate real estate NPL ratios.

The counter-cyclical buffer may marginally decrease, on one hand, as the counter-cyclical buffer has been extended over several quarters, and against the backdrop of fluctuating forward-looking indicators, some banks may need to increase their provisioning efforts. On the other hand, attention should also be paid to the Stage 3 financial asset provisioning coverage ratio, as some banks may need to supplement the impairment provisions for Stage 3 financial assets.

Looking ahead, the revenue growth rate of banks in 2024 is expected to bottom out and stabilize. The pace of scale expansion in 2024 may slow down, and it is likely to remain relatively stable thereafter. The net interest margin may still trend downward within the year, but with the gradual improvement of deposit costs, the net interest margin is expected to stabilize. Intermediate business income is expected to continue to face pressure, and the contribution of other non-interest income to revenue may marginally slow down.

The space for counter-cyclical buffer may be limited, and the profit growth rate may gradually approach the revenue growth rate. As of the end of the first quarter of 2024, the loan-to-reserve ratio of listed banks has dropped to 3.06%, and the supporting effect of the counter-cyclical buffer on profits may decrease. The overall performance of listed banks in 2024 may fluctuate slightly, prolonging the bottoming period, but the performance of some high-quality regional banks may still lead the overall sector.

The high dividend payout ratio of banks may be sustainable.

At present, a stable high dividend yield may still be the main direction for capital allocation. With insufficient social financing demand and continuously declining long-term bond yields, as of June 14, 2024, the yield on 10-year government bonds has fallen below 2.5%. Against the backdrop of the new "Nine National Articles," delisting supervision has become stricter, and the volatility of small-cap stocks has intensified. The new "Nine National Articles" also propose to strengthen the supervision of cash dividends of listed companies and increase incentives for companies with high-quality dividends, which may further strengthen the dividend investment strategy.

For banks, the scope of dividends is gradually expanding from state-owned large banks to some small and medium-sized banks. The cash dividend ratio of state-owned large banks is stable, with an average dividend yield of 5.48% as of June 14, 2024, which is 323 basis points higher than the yield on 10-year government bonds and still has a certain cost-performance ratio. Some small and medium-sized banks also have characteristics such as low valuation and a stable cash dividend ratio, and their fundamentals are excellent or are in a period of improvement, with a dividend yield above 5% (such as Bank of Beijing, YuNong Galaxy, etc.). In addition, several banks have announced mid-term dividend plans, further strengthening the dividend attributes of the sector.

Capital requirements constrain the dividend payout ratio of banks, thereby affecting the dividend yield. A comprehensive judgment suggests that banks may be able to continue to maintain a high dividend payout ratio for the following two main reasons:

First, a slowdown in balance sheet expansion can reduce capital consumption. The monetary policy implementation report for the first quarter of 2024 mentioned that "the existing stock of money and credit is not low and will continue to play a role," "reduce the idle turnover and sedimentation of funds, and vigorously develop direct financing, which may slow down the growth rate of credit volume," adjust the financial GDP accounting from mainly referring to deposit and loan balances to referring to bank profit indicators, and stop "manual interest supplementation." The above factors may all indicate that the growth rate of bank credit scale will slow down subsequently.

Second, the implementation of new capital regulations may form a certain capital saving. The new capital regulations have been implemented since the beginning of 2024, and the average core tier 1 capital adequacy ratio of listed banks at the end of the first quarter of 2024 has increased by 16 basis points compared to the end of 2023.Some regions still maintain a relatively fast expansion of credit scale, and the performance prosperity of city commercial banks and rural commercial banks in high-quality areas is expected to continue. Although the national loan growth rate is showing a downward trend, Zhejiang, Sichuan, Jiangsu, Beijing, and Shandong still maintain a relatively high loan growth rate. As of April 2024, loans in the above five regions have maintained double-digit growth.

The revenue growth rate of some high-quality regional city commercial banks and rural commercial banks is relatively resilient. These banks may benefit from the strong credit demand in their respective regions, and their revenue growth rate is relatively strong. The performance prosperity of city commercial banks and rural commercial banks in high-quality regions is expected to continue.

The asset quality of some high-quality regional city commercial banks and rural commercial banks continues to be superior, and the provisions are relatively sufficient, which may support them to maintain a superior profit growth rate. The sustainability of profit release is related to asset quality and provision levels. In 2023, the situation of listed banks using provisions to repay profits was relatively more common. This requires not only the non-performing loan ratio and forward-looking indicators of asset quality to maintain a superior level but also sufficient provisions to support it. Some regional city commercial banks and rural commercial banks are in a relatively superior economic environment, with a better customer base, which lays the foundation for the bank's asset quality.

Real estate policy optimization strengthens the expectation of the cycle

The "517 Real Estate New Deal" stimulates real estate sales on the demand side, and most regions have followed the national policy to optimize and adjust mortgage policies. At this stage, the exposure of bank real estate stock risks has been relatively sufficient. If the sales and liquidity of real estate companies improve, the potential risk pressure of bank real estate loans is expected to decrease accordingly, promoting the further repair of the Galaxy sector's valuation.

The 2023 annual report shows that among state-owned large banks, the non-performing loan ratio of real estate for public companies in Industrial and Commercial Bank of China and Agricultural Bank of China began to decline for the first time. Among joint-stock banks, the non-performing loan ratios of China Merchants Bank, Minsheng Bank, CITIC Bank, and Ping An Bank have also begun to decline.

Looking at the data from listed banks, the peak of non-performing loans is often between 5%-8%. At present, not all real estate companies have risk events. It is conservatively assumed that 40% of real estate companies have risks. For real estate companies with risks, not all projects under the group will be at risk. Each project company has different situations. It is assumed that the proportion of risky projects among real estate companies with risks is 40%. Then the proportion of risky loans would be 16%.

Since commercial banks will confirm non-performing loans while disposing of and writing off non-performing loans, the peak of non-performing loans for public real estate loans will not reach the theoretical value of 16%. The actual non-performing loan ratio for public real estate of listed banks is lower than half of 16%. From this, it is judged that the banking industry is experiencing a turning point in the non-performing loan ratio of public real estate, and it is difficult for the non-performing loan ratio of listed banks to exceed 8%.

Looking at the sources of real estate development funds, the proportion of domestic loans is only 12% (2023), which means that the proportion of bank loans to the total value of the project is also around this number. Moreover, bank real estate development loans usually require collateral and have a higher repayment order among all creditors, plus the proportion of loan amount/total value is low, so the actual loss ratio is also lower.

Development loans are used for project construction. It is assumed that the average construction cost is 30% of the total value, and developers need to raise part of their own funds. Moreover, projects do not need to be completed before pre-sale, so the required development loan funds are significantly lower than 30%. In the early years, housing prices were not high, and the proportion of construction costs was higher, leading to a relatively high proportion of domestic development loans around 2000. Later, as housing prices rose and the proportion of construction costs decreased, the proportion of development loans decreased.Bank non-performing loans (NPLs) do not remain on the books indefinitely. In addition to "recovering" NPLs, they can also be "written off." In response to loan write-offs, the Ministry of Finance has issued a special document, the "Financial Enterprise Bad Debt Write-off Management Measures."

In 2023, listed banks wrote off a total of 848.1 billion yuan in NPLs, while the year-end NPL balance was 2,031.8 billion yuan, which is 2.4 times the amount written off that year. On average, NPLs are written off within 2.4 years. The non-performing loan ratio for real estate companies began to rise rapidly in 2021. If we calculate based on a 2.4-year bad debt write-off period, banks would start to write off a large amount of loans in 2023-2024.

If the reduction in NPLs due to write-offs and recoveries in a given period exceeds the generation of new NPLs, then the NPL balance will begin to decline, without waiting for the full exposure of real estate risks.

According to the "Financial Enterprise Bad Debt Write-off Management Measures," loans can be written off after being identified as bad debts and obtaining necessary written materials. It should be noted that the identification of bad debts requires the completion of the bankruptcy liquidation of the debtor, and loans to enterprises still in operation can also meet the criteria for bad debt identification.

For developer loans that have not officially gone through bankruptcy liquidation, according to the "Materials" (Article 7) attached to the "Financial Enterprise Bad Debt Write-off Management Measures," if legal enforcement has been pursued for 180 days without recovering the loan, or if enforcement is difficult or there is no property to enforce, these can also be identified as bad debts and written off.

Moreover, according to Articles 9 and 10, as long as one financial institution obtains a court ruling that there is no property to enforce or it is difficult or impossible to enforce on a loan, then all financial institutions with the same conditions on loans to this debtor can identify the debt as a bad debt and write it off.

According to the "Materials" (Article 13), if a financial institution has packaged and transferred non-performing loans, the portion of the disposal recovery funds that is lower than the loan balance can be written off after identifying it as a bad debt.

Analyzing the exposure and disposal order of China's debt risks, it is not "real estate leading to the exposure of upstream and downstream risks," but rather "other industry risks are cleared first, and then the real estate with risk exposure is dealt with last." During the period when the real estate non-performing rate increased, the non-performing rates in other industries had already begun to decline, and after offsetting each other, the overall non-performing rate began to improve. Currently, only the risks of real estate developers are relatively high, and other related industries have not experienced industry-wide debt crises.

Looking at the asset-liability ratio of residents, China is lower than developed countries such as Japan, the United States, Germany, and the United Kingdom. Moreover, the ratio of loans to deposits for Chinese residents has been continuously declining since the end of 2021, after a trend of rising since 2009. This ratio finally turned down at the end of 2021, reducing the risk margin for the residential sector.

Furthermore, China's banking industry has not engaged in subprime lending, nor has it offered adjustable-rate mortgages (ARMs) with interest rate resets. On the contrary, Chinese residents have even seen a situation of repaying loans early and actively deleveraging.At present, China's personal bankruptcy system is still in the pilot phase, and it is expected to increase the crackdown on debt evasion. Chinese banks will not widely demand customers to supplement collateral or repay loans in advance due to a decline in housing prices. In the past, cities like Wenzhou, Ordos, and the Beijing metropolitan area have experienced significant drops in housing prices, but "abandoning homes" and loan defaults were not the mainstream, and the non-performing loan ratio of personal housing mortgages has remained low for many years.

A slowdown in the speed of risk exposure is a positive signal.

Banks, as creditors of real estate developers, the inflection point in real estate is not a "transaction volume inflection point" or a "housing price inflection point," but a "developer risk inflection point." From the perspective of the profit and loss statement, as long as the speed of risk exposure for developers slows down, the corresponding impairment losses provided in the bank's profit and loss statement will decrease year-on-year, and the profit and loss statement will be repaired.

As mentioned above, the non-performing loan ratio for loans to real estate companies has marginally decreased in many banks, and there are already signs of an inflection point in developer risks. The inflection point in transaction volumes and even housing prices has not yet been seen in the statistical data.

The market often focuses on bank financial reports and interest spread data directly disclosed by regulators. It should be noted that this data is a cumulative value, that is, the interest spread figures in the 2023 annual report and 2023 regulatory indicators are the average for the four quarters of 2023, which makes the interest spread in the first quarter of 2024 drop significantly compared to 2023. However, according to our calculated single-quarter interest spread, the interest spread in the first quarter of 2024 only decreased by 2BP compared to the fourth quarter of 2023. With the advancement of deposit regulation since the second quarter, it is expected that the interest spread in the second quarter of 2024 will stabilize quarter-on-quarter.

Reviewing the valuation performance of bank stocks, from the end of 2022 to the end of 2023, when the market's confidence in the fundamentals of banks was not strong, stocks with higher dividend rates were favored. As the economic fundamentals have been somewhat repaired, the dividend rate of city commercial banks has approached the level of state-owned large banks, and the gap between the valuation and fundamentals of high-performing stocks has been corrected. If real estate risks begin to decrease and macroeconomic confidence gradually repairs, then the valuation of joint-stock banks is expected to rise synchronously.

In theory, the BETA of city commercial banks is not weaker than that of joint-stock banks. In the short term, the valuation of many small banks may be easily affected by the impact of convertible bonds (which may trigger a forced redemption or the convertible bond is about to expire).

From the overall perspective of banks, the current valuation of joint-stock banks is relatively low, which may be affected by the high proportion of loans in the real estate field. As of June 14, 2024, the PB valuation of joint-stock banks is 0.52 times, the lowest among the four types of banks. With the introduction and implementation of a new round of real estate policies, the expectation of debt risks for real estate companies is expected to be reduced, and the valuation repair of joint-stock banks with a high proportion of real estate loans to corporates may be more obvious.