Galaxy Securities listed bank semi-annual report performance interpretation: marginal improvement in profit growth rate continues to be optimistic about the value of sector dividends.

Galaxy Securities released a research report stating that the marginal improvement in bank profit growth, narrowing of interest rate differentials, and gradual optimization of liability costs are becoming evident. The deployment of the "five major articles" is advancing, with a higher level of credit investment in key areas driving the optimization of credit structure. The further reduction of deposit benchmark interest rates in July is further beneficial for reducing liability costs, providing support for improving interest rate differentials. At the same time, the unchanged orientation of preventing and resolving financial risks is helpful for improving the asset quality and risk expectations of banks. In the current environment of asset scarcity, the dividend value of the banking sector is still promising, maintaining a recommended rating with a focus on two main themes: (1) State-owned banks benefiting from the long-term issuance of special national bonds and stable dividend ratios, recommended Industrial and Commercial Bank of China (601398.SH), China Construction Bank Corporation (601939.SH), etc.; (2) High-quality small and medium-sized banks with stable performance growth, recommended Bank Of Jiangsu (600919.SH), etc. The main points of Galaxy Securities are as follows: Revenue continues to be negative, with marginal improvement in profit growth: In the first half of 2024, the operating income of listed banks decreased by 1.95% year-on-year, while net profit attributable to shareholders increased by 0.37% year-on-year; ROE was 11.42%, a decrease of 0.68 percentage points from the same period last year. In the second quarter of 2024, operating income of listed banks fell by 2.18% year-on-year, while net profit attributable to shareholders increased by 1.46% year-on-year, returning to positive growth compared to the previous quarter. The overall performance of listed banks is relatively weak, mainly influenced by pressure on net interest income and intermediary income, with other non-interest income core to investment income performing relatively well and contributing to performance. The pressure on provision for loan losses has eased, supporting profit growth in the second quarter. The performance of segmented sectors shows differentiation, with urban and rural commercial banks performing relatively well, leading in high-quality regional banks. On-balance sheet business continues to be affected by volume and price pressures, with the optimization of liability costs benefiting interest rate differentials: In the first half of 2024, the on-balance sheet business of listed banks continued to be affected by volume and price pressures, with a slowdown in scale expansion and a decline in asset yields suppressing the growth space of net interest income, resulting in a 3.43% year-on-year decrease in net interest income. Net interest margins continue to be affected by the decline in asset yields, but the gradual release of the effectiveness of optimizing liability costs brings opportunities for improving interest rate differentials. In the first half of 2024, the net interest margin of listed banks was 1.64%, a 14 basis point decrease from the end of the previous year. The decline in asset yield has more impact on the interest margin, with the effectiveness of the reduction in deposit benchmark interest rates being realized. In the first half of 2024, the asset yield and liability cost rate were 3.78% and 2.21%, respectively, down by 19 and 6 basis points from the end of the previous year. Looking ahead to the second half of the year, there is a significant disparity in interest rate differentials between existing mortgages and new mortgages, with a gap of 68 basis points, indicating room for downward adjustment, which may bring downward pressure on interest rate differentials. Under the neutral assumption that existing mortgage rates are reduced by 50 basis points, the calculation indicates a 3.55 basis point impact on bank interest margins. The expansion of the balance sheet continues to slow down. As of June 2024, the loan balance of listed banks increased by 5.88% from the end of the previous year, with a pattern of "strong in public, weak in retail" persisting, and a slowdown in the growth of corporate loans; the deposit balance increased by 3.22% from the end of the previous year, with a significant impact on the growth of deposits in state-owned banks due to the suspension of manual interest supplementation. The decrease in intermediary income is widening, with investment income contributing to other non-interest income: In the first half of 2024, non-interest income of listed banks increased by 2.03% year-on-year. A decrease in fees led to poor performance in agency business, with intermediary business down by 12.03% year-on-year; other non-interest income increased by 20.31%. Among them, investment income continues to benefit from the decline in interest rates, growing by 27.75% year-on-year, driving growth in non-interest income. Overall asset quality remains stable, but retail credit risk needs attention: As of June 2024, the non-performing loan ratio of listed banks was 1.17%, on par with the first quarter and the end of the previous year; the provision coverage ratio was 304.7%, down by 4.77 percentage points from the end of the previous year. Various indicators are at a relatively optimal level in recent years, with overall sound asset quality and sufficient risk mitigation. Meanwhile, based on incomplete disclosure in the semi-annual report, as of the end of June, the non-performing loan ratio for retail loans at 31 banks was 1.35%, up by 16 basis points from the end of the previous year, indicating a further increase in risk that needs to be continuously monitored and addressed.