Huafu Securities: The reduction of interest rates on existing home loans has been implemented, driving the banking sector through three factors.

Hua Fu Securities released a research report stating that, according to calculations, the 50 basis point adjustment of existing home loan rates this time will have a negative impact of about 6 basis points on the overall net interest margin of listed banks. From the perspective of net profit, if the existing home loan rate is lowered from the end of Q3 2024, it will negatively impact the full-year profit growth of listed banks in 2024 by about 2 percentage points. The banking sector's performance since the beginning of this year has been driven by three factors: the spreading of the dividend yield stock selection logic within the sector, the relaxation of real estate policies, and the market's expectation that the downward slope of banking net interest margin will slow down and the fundamentals are about to bottom out. Looking ahead, the banking sector will need to further examine the effects of previous policies and the future trend of fundamentals. Hua Fu Securities main points are as follows: The reduction of existing home loan rates meets expectations, with the policy intensity in line with expectations. In the short term, the adjustment of existing home loan rates will have a certain impact on the net interest margin of banks. According to calculations by Hua Fu Securities, the 50 basis point adjustment of existing home loan rates will have a negative impact of about 6 basis points on the overall net interest margin of listed banks. From the perspective of net profit, if the existing home loan rate is lowered from the end of Q3 2024, it will negatively impact the full-year profit growth of listed banks in 2024 by about 2 percentage points. However, in the long term, the adjustment of existing home loan rates is expected to relieve the phenomenon of residents repaying their loans early, benefiting the credit structure and asset quality of banks. In terms of credit extension, the adjustment of existing mortgage rates will narrow the interest spread between existing mortgage loans and newly originated mortgage loans, weakening the incentive for residents to repay early. The scale of bank mortgage loans is expected to stabilize and rebound. Mortgage loans have long durations and low credit costs, making them quality assets for banks. Holding existing mortgage loans can effectively alleviate the pressure on banks to reinvest their assets. In terms of asset quality, on the one hand, the non-performing loan ratio of mortgage loans is significantly lower than the overall non-performing loan ratio of banks, and holding more quality mortgage loans is expected to provide some support to the asset quality of banks. On the other hand, from the perspective of mortgage loans themselves, the non-performing loan ratio of bank mortgage loans has slightly increased since the beginning of this year. With the decrease in mortgage rates on the residential side, the pressure on residents to repay mortgages will ease, reducing the pressure on the generation of non-performing loans for bank mortgage loans, and credit costs are expected to marginally decrease. The reserve requirement ratio is expected to be lowered by 0.5 percentage points in the near future. On the one hand, lowering the reserve requirement ratio can free up more liquidity, support the asset deployment of banks, and provide approximately RMB 1 trillion of long-term liquidity to the financial market. On the other hand, it can also alleviate the pressure on bank interest margins. Based on static calculations using data from listed banks in H1 2024, the reduction in reserve requirements this time is expected to contribute around 1 basis point to the average positive impact on the interest margins of listed banks. The policy rate is expected to be lowered, with the 7-day reverse repurchase operation rate decreased by 0.2 percentage points. Hua Fu Securities predicts that the impact of this interest rate cut on bank interest margins will be limited. On the asset side, the interest rate cut will only affect the pricing of new and rollover loans in the short term, with a more noticeable boost to loan growth. The repricing of assets in 2025 may have some impact on interest margins, but liabilities may see corresponding hedges by then. On the liability side, there is room for improvement in bank deposit costs, which may enhance the hedging effect of narrowing interest margins on the asset side. Banks have lowered deposit rates several times this year and started manual interest adjustments in April in accordance with regulatory requirements, leading to a significant decrease in the deposit cost rate of listed banks in the first half of 2024. After this policy rate cut, banks are expected to continue lowering deposit rates, with deposit costs expected to steadily decline. Investment targets: Firstly, Shanghai Pudong Development Bank (600000.SH) is recommended. Shanghai Pudong Development Bank is currently in a phase of reversing difficulties, with the company's existing non-performing loans close to being cleared, a continuous decline in the non-performing loan generation rate, marginal improvement in credit costs, and the potential release of profit elasticity. Moreover, the company has increased its credit deployment since the fourth quarter of last year, and the enhanced momentum of credit asset deployment is expected to drive revenue growth upwards. Second, attention is advised on China Merchants Bank (600036.SH), Bank Of Jiangsu (600919.SH), and Bank Of Chongqing (601963.SH). Risk warnings: Weak macroeconomic conditions; policy advancement falling short of expectations; credit demand lower than expected; market style switch.