Shenwan Hongyuan Group: Medium to long-term funds may be the main increment of the bank sector by 2025, focusing on high dividend mainline small and medium-sized banks at the current stage.

Shenwan Hongyuan Group released a research report stating that bank stocks are a low-volatility dividend in counter-cyclical periods, with dominant absolute returns in pro-cyclical periods and elastic varieties in later periods. Positive economic expectations and policies facilitating the entry of medium to long-term funds into the market have been frequent, with policy and funding factors acting as catalysts. While the fundamental factors need to digest the current policy impacts, stability is key. If the economy steadily recovers, banks will also demonstrate elasticity in later periods. From a stock perspective, the focus continues to be on solid reserves and quality regional banks in regions with growth opportunities under favorable policies, as well as undervalued stock banks. Currently, the focus is on small and medium-sized banks under the high dividend theme. If the real estate market continues to improve and there is a trend of improving consumption, attention can be paid to pro-cyclical targets. Shenwan Hongyuan Group's main points are as follows: The bank sector is expected to benefit from medium to long-term funds, mainly from insurance funds, becoming the major incremental funds in the banking sector by 2025 and even in the medium term. On one hand, under policy guidance, medium to long-term funds assume more value enhancement and stabilizing stock market functions. Since the second half of 2023, multiple departments have called for insurance funds to enter the market, and the "Implementation Plan for Promoting the Entry of Medium to Long-term Funds into the Market" further requires that state-owned large insurance companies invest 30% of their new premiums in A shares from 2025. If we assume that the growth rate of premiums for the next 3 years for the five major state-owned insurance companies is around 5% (consistent with the GDP growth rate), an estimated total of 1.4 trillion yuan in premiums will enter the market. Assuming that 13.1% of the total market value of listed banks (as a proportion of the total A-share market value) flows into the banking sector, this amounts to approximately 188.1 billion yuan. On the other hand, this is also a necessary measure to break the deadlock of "asset shortage" under pressure from interest rate differentials for insurance companies. Due to low long-term interest rates (the 10-year treasury bond yield is around 1.7%), intensified "asset shortage," and rigid constraints on liability costs (the breakeven interest rate for the life insurance industry over the past 10 years has averaged 3.6%), the need for OCI allocation after switching to IFRS9 has increased (stocks included in OCI will not affect current profits, but dividends can increase performance), and assets with stable profits, high dividends, and secure high dividend payouts become even scarcer. Most importantly, banks are not only heavyweight sectors but also possess rare attributes of stable profitability, continuous operations, and high dividends, which are particularly suitable for insurance fund demand. Banks constitute around 13.2% / 8.6% / 20.1% of the weightings in the Shanghai and Shenzhen 300 Index / CSI A500 Index / Shanghai 50 Index, and from 2024 to the end of February 2025, funds flowing into the sector surpassed 134 billion yuan with the expansion of the indexes. The special position of banks in the financial system ensures sustainable operations, and clearing relatively complete bad debts and carrying out sufficient provisions (as of the third quarter of 2024, the provision coverage ratio of listed banks has increased by over 80 percentage points from the third quarter of 2016) can also support stable profit performance. Coupled with stable high dividend characteristics (from 2018 to 2023, the standard deviation of dividend payout ratio of listed banks is only 1 percentage point, the highest stability among all industries; dividend yield is around 6.4%, second highest in all industries), their scarcity is even more pronounced. The Group believes that this wave of insurance funds increasing their stakes in banks is just the beginning, and more is yet to come. Insurance funds will focus on core aspects of individual stocks: emphasizing asset quality safety, seeking steady profits rather than high profits. In addition, small and medium-sized insurance companies also pay attention to the dispersion of bank equity ownership, shareholding bases, and potential board seats. Based on the four dimensions of stable profitability, asset quality safety, dividend performance, and core fundamentals, high-quality city and rural commercial banks in Jiangsu and Zhejiang regions are significantly ahead. Insurance companies also need to consider the restrictions of "two participations and one control" (holding or participating in the ownership of one bank or two banks; holding standards exceed 50%, shareholding requirements exceed 5%, but both comply with the principle of substance over form). According to the top ten shareholders of each bank, major mainstream insurance companies, such as Ping An Insurance, China Life Insurance, and The People's Insurance, are subject to these restrictions, while others are not. For A-share banks with large insurance shareholders, such as Industrial Bank, China Zheshang Bank, and Shanghai Rural Commercial Bank, are more likely to be targeted for increasing stakes. If focusing on stocks with leading fundamentals for stake increases, the Group believes that Bank of Suzhou, Jiangsu Changshu Rural Commercial Bank, and Jiangsu Suzhou Rural Commercial Bank are relatively advantageous. H-share targets with smaller capital and higher dividend yields have a higher cost-effectiveness for increasing stakes, making CITIC BANK, Bank of Chongqing, and Chongqing Rural Commercial Bank worth watching. Risk warning: The effectiveness of stable growth policies is lower than expected, the pace of economic recovery is slower than expected; disturbances in platform interest rate cuts, and the process of stabilizing interest spreads slower than expected; accelerated exposure of residual bad debt risks.