CITIC SEC: The banking sector still has a strong value space in the short term with certainty

CITIC SEC released a research report stating that, based on the latest remarks from the central bank, the central bank has taken a positive stance on the policy of financial support for high-quality economic development. However, the introduction of current incremental monetary policies still depends on the central bank's timely decisions based on the domestic economic situation, exchange rate trends, bond market trends, and other factors. Currently, the central bank highly values the stability of bank operations and interest rate pressure, with the pricing balance of bank assets and liabilities being one of the important considerations for future relevant policies. Since the beginning of 2025, bank stocks have performed steadily, outperforming the dividend sector. The core reason is that there is still strong value space for the fundamentals of bank stocks corresponding to the common stocks. Under the background of reassessing bank credit risk assets, the assumption is that the economy will not enter an extremely pessimistic scenario. The reality of "better than trading valuation implied expectations" continues to be interpreted, along with the positive impact of institutions such as insurance, passive, and active behavior on allocation. Therefore, CITIC SEC expects that in the first half of 2025, bank stocks still have a strong and certain return trend. Key points from CITIC SEC: Events: On January 14, 2025, the State Council Information Office held a series of press conferences on the "Achievements of China's High-Quality Economic Development," introducing relevant information on financial support for high-quality economic development. Overview of policy stance: Ensure a loose social financing environment and further reduce the overall social financing costs. During the press conference, the central bank reiterated the statements from the monetary policy committee meeting in the fourth quarter of last year and the annual work conference in 2025, stating that they would adjust and optimize policy measures and rhythms according to the domestic and international economic and financial situations and the operation of financial markets, to maintain ample liquidity and ensure a loose social financing environment. We believe that the central bank has taken a proactive stance on the policy of financial support for high-quality economic development. However, the introduction of current incremental monetary policies still depends on the central bank's timely decisions based on the domestic economic situation, exchange rate trends, bond market trends, and other factors. In addition, the central bank mentioned that they will "further reduce the overall social financing costs on the basis of ensuring the healthy operation of the financial industry," which reflects the high importance given by the current regulatory authorities to the stability of banks and other financial institutions. This may imply a protective attitude towards bank interest rate spreads. Support for capital market currency tools: Assist in managing the market value of listed companies and maintaining capital market stability. 1) Review of the effects of two tools: The tools effectively enhance the financing and investment capabilities of relevant industry institutions, listed companies, and shareholders. By the end of 2024, the total amount of operations for securities, funds, and insurance companies exceeded 100 billion yuan, and the contract amount for stock repurchases and loan holdings exceeded 30 billion yuan. 2) Emphasis on tool functionality, with the possibility of further improving tool design and system arrangements: The central bank mentioned that the purpose of the tools is to help manage the market value of listed companies and assist securities, funds, and other industry institutions in maintaining the stability of the capital market, which is conducive to "correcting overvaluation in the capital market." In addition, the central bank also stated that they will "further improve tool design and system arrangements and continuously enhance the convenience of tool use." We believe that the two tools, as positive attempts by the banking system to support the capital market, on the one hand, help maintain the stable development of the capital market, preventing a negative cycle of market weakness and equity pledge risks. On the other hand, after the gradual improvement of these tools in practice, they are expected to provide suitable credit assets for the banking system. Outlook for interest rate policies: Strengthening the implementation of interest rate policies to further reduce the overall liabilities of banks. To improve the transmission and execution of interest rate policies, expand the space for interest rate policies, the central bank mentioned during the conference that they will "further reduce the overall liabilities of banks, alleviate the pressure on net interest margins, and better balance the health of banks' balance sheets and the decline in financing costs for the real economy." We believe that the current central bank attaches great importance to the stability of bank operations and the pressure on interest rate spreads. Subsequently, the deposit benchmark interest rates for banks are expected to continue to decrease. In addition, obstacles to interest rate transmission, such as valuation smoothing through self-built valuation and using trust channels for smoothing net asset values in wealth management products, will face further constraints, effectively promoting cost savings for the banking system. Risk factors: Significant decline in macroeconomic growth rate, unexpected deterioration in bank asset quality; substantial fluctuations in regional economic vitality; slower than expected progress in company strategies; fiscal policies, industrial policies exceeding expectations. Investment strategy: The banking sector still has a strong and certain value space in the short term. Based on the central bank's latest remarks, we believe that the central bank has taken a positive stance on the policy of financial support for high-quality economic development. However, the introduction of current incremental monetary policies still depends on the central bank's timely decisions based on the domestic economic situation, exchange rate trends, and bond market trends. Currently, the central bank highly values the stability of bank operations and the pressure on interest rate spreads, with the pricing balance of bank assets and liabilities being one of the important considerations for future relevant policies. Since the beginning of 2025, bank stocks have performed steadily, outperforming the dividend sector. The core reason is that there is still strong value space for the fundamentals of bank stocks corresponding to the common stocks. Under the background of reassessing bank credit risk assets, our assumptions are based on the scenario of the economy not entering an extremely pessimistic state. The reality of "better than trading valuation implied expectations" continues to be interpreted, along with the positive impact of institutions such as insurance, passive, and active behavior on allocation. Therefore, it is expected that in the first half of 2025, bank stocks will still have a strong and certain return trend.