Open Source Securities: Pressure Continues, Banking Performance Still Resilient, Retail and Corporate Bad Trends Differentiated.

The open-source securities released a research report stating that benefited from the improvement of asset quality in the public business sector, which offset the upward pressure of risks in the retail sector. The listed banks continued to reduce asset impairment losses and continued to make minimal provisions, contributing to profits. The provision also marginally increased the contribution to performance, resulting in a slight improvement in profitability indicators. The net profit growth of listed banks turned positive compared to Q1. Despite some companies experiencing cash flow pressure under the current economic situation, the ability of public enterprises to resist systemic risks is still stronger than individuals. Additionally, due to concerns about the impact of real estate and infrastructure investment in the previous period, listed banks have made more provisions for the future in the public business sector, so even if losses are incurred, the impact in the current period is still limited. Key views of the open-source securities: In the process of economic recovery, banks continue to face operating pressures. The current economic environment is still volatile, with expectations of a decrease in household income and a weakening of business investment momentum. Listed banks are still facing significant external pressures. In terms of operating indicators, the revenue growth of listed banks is generally under pressure. On one hand, insufficient effective demand has slowed down the expansion of bank size and the narrowing pressure of asset yield rates on the asset side, exacerbating the pressure to narrow interest rate spreads. On the other hand, non-interest income contribution is limited, with fee income continuing to decline, affecting state-owned banks significantly. However, benefiting from the improvement of asset quality in the public business sector and offsetting the upward pressure of risks in the retail sector, listed banks continue to make minimal provisions for asset impairment losses, contributing to profits. Therefore, profitability indicators have marginally improved, with the net profit growth of listed banks turning positive compared to Q1. Internal and external factors resonate, and the growth rate of bank balance sheet expansion slows down. In the first half of the year, the marginal growth rates of deposits and loans of listed banks have slowed down. Credit growth is mainly driven by the public business sector, while the momentum of retail loan issuance has decreased. The most significant impact of insufficient effective demand on external factors, especially for banks with weak asset deployment capabilities and no competitive advantage in customer base, will continue to pressure credit growth and affect deposit-taking capabilities. In addition, with the People's Bank of China's credit control strategy of "activating existing stocks and reducing idling facilities" and the change in the quarterly GDP accounting method from a scale indicator to an income indicator for the financial industry, the impact of regulatory factors has weakened the motivation for blind expansion of bank size. From internal factors, risk-return factors have prompted banks to actively reduce customers: for example, some large enterprise customers have strong bargaining power, and although banks have expanded their loans to them, it has a negative impact on interest rate spreads. Moreover, due to the impact of the economic downturn, banks have increased the scale reduction of potential high-risk customers, tightened credit policies, and voluntarily withdrawn from competition with some customers. Although these factors have led to pressure on bank size expansion in the current period, they have also led to a positive trend towards future competition in the banking industry, improving the operating environment of the banking industry. The trend of non-performing loans in retail and public sectors is diverging, and the risk of personal loans may rebound within the year. Under the stable non-performing loan rate of listed banks, the risk of retail and public business sectors is diverging. Although some enterprises are facing cash flow pressure under the current economic situation, the ability of public enterprises to resist systemic risks is still stronger than that of individuals. In addition, due to concerns about the impact of real estate and infrastructure investment in the previous period, listed banks have made more provisions for the future in the public business sector, so even if losses occur, the impact is still limited in the current period. In the retail sector, due to the decrease in individuals' repayment ability and willingness, all types of retail loans have seen a marginal increase in non-performing loan rates. If the expectations of household income cannot be reversed, the pressure on the asset quality of personal business loans and credit cards in some banks may continue within the year. In addition, rural commercial banks have significantly made more credit provisions, which may highlight the significant pressure on small and micro-enterprises and individual industrial and commercial households' operations within the year. Investment recommendations: For state-owned banks with growing revenue and profits and controllable risks in the retail business, the investment target is Agricultural Bank Of China (601288.SH); for high-quality banks with dividend dividend strategies, the investment targets are CITIC BANK (601998.SH) and Shanghai Rural Commercial Bank (601825.SH); for banks with advantages in the public business sector, the investment targets are Bank Of Jiangsu (600919.SH), Bank Of Changsha (601577.SH), Bank Of Chengdu (601838.SH), and Jiangsu Jiangyin Rural Commercial Bank (002807.SZ); pay attention to the valuation restoration of core assets in the banking industry under economic recovery, the investment targets are China Merchants Bank (600036.SH) and Bank Of Ningbo (002142.SZ). Risk factors: macroeconomic downturn, unexpected decline in house prices, uncertainty in overseas economic spillovers.