CITIC SEC: Operating indicators remain stable, bank sector valuations still have clear upside potential.

CITIC Securities released a research report stating that the real estate financial risks are still within a controllable range, and it does not rule out the possibility of more powerful policies to boost the cash flow of real estate companies in the next stage. Performance reports show that the fundamentals of banks are solid, with operating indicators performing better than expected. In terms of sector investment, based on the repositioning of risk and growth expectations for the banking business model, overlaying the scenario analysis of the economy and policies in 2025, there is still a clear upward valuation space for the banking sector. For individual stock combinations, two main recommendations are given: 1) Steady dividend contributions to stable returns by selecting stocks with stable revenue growth, stable dividend ratios, stable asset quality, and low valuation volatility; 2) Companies with outstanding business models are expected to return to normal valuation premium range: selecting stocks with high and strong ROE, with valuation premiums still at low levels. Against the backdrop of a stable real estate market, it is expected that the overall quality of bank loans for real estate development will remain stable. Fine-grained management of project loans is expected to have limited impact on banks. Banks have adopted fine-grained management for loans to project companies even if there are changes in the creditworthiness of the entities, banks do not need to downgrade all relevant exposures and fully provision reserves, resulting in limited impact on the asset quality of banks. With a stable real estate market backdrop, the degree of real estate financial risks remains stable. Bank financial reports in 2024 showed a decrease in the non-performing loan ratio for real estate development loans for the first time, implying a solidifying effect of policies on real estate financial risks. In the next stage, financial and real estate policies, together with fiscal policies and the revitalization of real estate assets of real estate companies, will further stabilize the risk expectations for real estate-related loans. Despite some fluctuations in the fund market, bank bond issuance and credit extension are expected to remain active in January. The tax period in January and the central bank's pause in purchasing government bonds have affected the fund market volatility this week. There is an obvious hierarchy in funds, with large banks maintaining a higher safety margin. According to data from Wind, the R007-DR007 weekly average has risen significantly from 3bps to 73bps, with DR007 still below 1.9%. In addition, according to the forex trading center, the fund sentiment index for large banks is lower than that of small banks and non-banking institutions, indicating that large banks have a higher safety margin in terms of funds. It is expected that fund market disturbances will have a relatively small impact on bond allocations and credit extensions. The interest rate fluctuation in the bond market this week is significantly smaller than that in the fund market, mainly due to bank allocation behavior focusing on the whole year, preferring to allocate credit and rate bonds earlier, with demand stronger than supply. Bank performance reports better than expected, showing operational stability. This week, five listed banks disclosed their 2024 performance reports, including four commercial banks and one city commercial bank. The weighted average revenue/net profit growth in 2024 compared to the previous year was +0.6%/+3.7%, with no significant drop in performance for any of the five banks, with the maximum revenue decline being a decrease of 1.5% and net profit continuing to grow. Overall, the performance of the five banks remained stable or marginally improved compared to the third quarter, indicating the solid operational capability of banks. Risk factors: - A significant downturn in macroeconomic growth - Unexpected deterioration in bank asset quality - Unexpected changes in regulations and industry policies - Development strategy execution of companies falling short of expectations.