UBS: it is expected that the net interest margin of the banking industry will continue to be under pressure by 2025, with state-owned large banks performing better in the short term.

At the 25th UBS Greater China Conference, the UBS research team expressed their views that the banking industry will face challenges such as further decline in interest rates and ROE by 2025. The bank also stated that opportunities may arise from these challenges, with expectations that the low interest rate environment will accelerate the recovery of the real estate market, reducing its impact on banks. Additionally, there will be increased efforts in the disposal of local government debt, leading to gradual optimization of the banks' asset structure. In terms of investments, UBS believes that state-owned banks are a good choice during times of significant market uncertainty, while joint-stock banks' stock performance depends on economic growth and is influenced by consumer spending and real estate sales. As reliable high dividend-paying stocks, the entire banking sector still holds some attraction in a low-interest rate environment. According to the UBS macro team's forecast, the central bank may cut interest rates by 30-40 basis points in 2025 and further by 20-30 basis points in 2026, while continuing to implement supportive policies for the real estate market. Looking ahead to 2025, monetary policy is expected to remain accommodative, with a new round of interest rate cuts likely to accompany further reductions in deposit rates, leading to a continued narrowing of bank interest rate spreads. As of the third quarter of 2024, the banking industry's interest rate spread had dropped to 1.53%. UBS believes that due to the continued decline in interest rates, there is a significant downward trend in asset side income. With the possibility of a sustained decline in the central rate of macroeconomic policies, interest rate spreads in the banking sector will continue to be under pressure in a low-interest rate environment. However, the bank also stated that the increased disposal of local government debt helps optimize the banks' asset structure, with the impact of debt disposal on banks leaning towards the positive side. Furthermore, while the real estate market adjustment may take some time, the worst impact of the real estate industry downturn on banks is already in the past. UBS's team believes that there is significant divergence in the fundamental performance of different banks, with state-owned banks being a safe choice during periods of high market uncertainty, and joint-stock banks being high-elasticity stocks dependent on economic growth. G CHINA FIN, the head of industry research at UBS Investment Bank, Yan Mei, stated that shares of large state-owned banks are similar to high-yield bonds of the central government, exhibiting counter-cyclical characteristics and relatively stable performance in downturn cycles, outperforming the market in the past three years. In a low-interest rate environment, high-yield stocks still have attractiveness. From the perspective of Hong Kong stocks, the dividend yield of large state-owned banks is about 6-7%, while in A-shares it is around 4-5%. Some investors find dividend yields greater than 200 basis points above the ten-year national bond rate acceptable. Compared to large state-owned banks, joint-stock banks rely more on economic growth performance. Affected by multiple fee reduction measures, the intermediary revenue of joint-stock banks in retail banking, capital markets, and wealth management business significantly declined in 2024. "Entering 2025, with the weakening of base effect, it is expected that the decline in mid-income will be relatively limited; if there is a rebound in consumer spending and real estate sales, joint-stock banks are expected to have better stock performance." Furthermore, from the perspective of city commercial banks, dividend yields are attractive while also considering profit growth. Currently, the average dividend yield of A-share listed city commercial banks is around 5%, with some exceeding 6%, which is attractive compared to the low fixed-income market yield. UBS predicts a slight slowdown in asset and profit growth for city commercial banks in 2025, with some expected to achieve double-digit growth. Significant growth rates combined with high ROE will help maintain a certain valuation premium.