CITIC SEC: It is recommended to re-evaluate the investment value of bank stocks at this stage and recommend two main investment strategies.

CITIC SEC released a research report stating that the China Banking Regulatory Commission issued the "Measures for the Administration of Non-Performing Asset Business of Financial Asset Management Companies." The new regulations are based on the new demand for financialization of risk in order to support the implementation of debt policies. The new regulations expand the scope of asset acquisition for financial asset management companies, strengthen and refine risk control management requirements, and help banks dispose of risks and revitalize their assets, thereby strengthening the foundation of bank operations. At the current stage, the alleviation of credit risks in municipal investment and real estate sectors is a solid foundation for the stable net assets of banks. It is recommended to reassess the investment value of bank stocks at this stage and actively reap the benefits of policy dividends. In terms of individual stocks, two main themes are recommended: 1) the dividend theme still has room for growth, and large banks with high dividends and capital have more allocation value; 2) the growth theme contributes elasticity, and companies with excellent business models have more potential for valuation growth. Key points: On November 15, 2024, the China Banking Regulatory Commission issued the "Measures for the Administration of Non-Performing Asset Business of Financial Asset Management Companies" (hereinafter referred to as the new regulations). Key points from CITIC SEC: Policy background: Current characteristics, patterns, and demand changes in financialization of risk require policy support for increased debt relief efforts. 1) Aligning with new environment, new policies, and new demands, strengthening AMC professional capabilities. According to the China Banking Regulatory Commission, the asset structures and risk characteristics of commercial banks and other financial institutions have changed significantly. The new regulations aim to align with relevant policies such as the "Regulations on the Classification of Financial Assets Risks of Commercial Banks," helping financial asset management companies focus on their core business of non-performing assets and enhance their acquisition, management, and disposal capabilities. The new regulations also broaden the business scope of financial asset management companies, allowing them to engage in other non-performing asset-related new businesses such as consultancy services. This will help AMCs adapt to new market demands for non-performing assets. 2) Comprehensive policy coordination to support municipal investment and real estate debt relief, enhancing support for the real economy. On November 8th, the Standing Committee of the National People's Congress approved a 6 trillion yuan debt relief plan for local governments, aimed at restructuring existing implicit debts, and allowing "special debt funds to be used for the acquisition of idle land and existing housing stock." The new regulations come shortly after this announcement, emphasizing the expansion of non-performing asset acquisition scope, indicating the role of financial assistance and counter-cyclical adjustment in preventing and resolving financial risks, and supporting the development of the real economy in new situations. The new regulations are expected to help clear existing system barriers, effectively support the progress of municipal and real estate debt relief efforts. Policy highlights: Focus on business expansion, refine and deepen risk control, and enhance the role of AMC as a financial stabilizer. 1) Focus on core responsibilities, expand acquisition scope, strengthen professional capabilities, enhance differentiated core competitiveness. The new regulations require financial asset management companies to focus on their core responsibilities and business, enhance their professional capabilities in acquiring and disposing assets, and guide them to improve their abilities in a balanced manner. On this basis, AMCs are allowed to acquire financial assets held by financial institutions, other assets that have already been impaired, and define standards for the acquisition of non-financial institution non-performing assets. The new regulations also introduce new services such as consultancy and entrusted disposal related to non-performing assets, helping AMCs cultivate differentiated core competitiveness. 2) Refine and standardize the full range of business operations, deepen risk prevention and control. The new regulations not only elaborate on the entire process of AMC's acquisition, management, and disposal operations, outlining regulatory requirements for each key aspect, but also establish risk management and supervision sections to strengthen risk prevention and control through internal and external supervision. Core requirements such as "not providing a channel for financial institutions to evade asset quality supervision" and "strictly reviewing project sources" will enhance risk prevention and control. Impact on banks: Optimize balance sheets, relieve liquidity, facilitate credit repair and enhance operational stability. 1) Broadening the scope of AMC acquisitions will help banks revitalize assets and relieve liquidity. The new regulations orderly expand the scope of non-performing assets that AMCs can acquire, allowing them to acquire restructured assets held by financial institutions and other impaired assets, significantly assisting banks in revitalizing assets, relieving liquidity risks, optimizing balance sheets, and enhancing stability. This will enhance lending capacity, releasing more credit resources into areas supported by national policies. 2) Promote complementary debt relief policies to further support credit repair and enhance the net assets of banks. The new regulations align with new policies on financial asset classification, broaden the scope of AMC acquisitions, to some extent remove institutional barriers hindering the retrieval of non-performing assets related to debt relief, and further support the efficient progress of municipal investment and real estate debt relief. This will lead to the alleviation of credit risks in both sectors, thereby repairing the credit and net assets of banks, providing impetus for the valuation uplift of bank stocks. 3) Strict asset disposal will enhance the efficiency of transferring non-performing assets, aid banks in prudent operation. Under the new regulations, stringent standards for authenticity and cleanliness will help evaluate non-performing assets during transfer, and requirements such as not using intermediaries to obtain projects or provide illegal financing will enhance the transparency of asset transfers. Overall, this will encourage banks to further optimize internal control processes, strengthen risk identification, monitoring, and disposal mechanisms to enhance risk resilience and strengthen the overall stability of the banking industry and the financial system. Risk factors: Significant decline in macroeconomic growth; deterioration in bank asset quality beyond expectations; unexpected changes in regulatory and industry policies; companies not meeting expected development strategies.