How to estimate the impact of bond yield volatility on the performance of the banking sector?

Orient released a research report stating that the current period is characterized by the intensive implementation of stable growth policies, with loose monetary policy leading the way followed closely by fiscal policy. Local debt issuance is accelerating significantly, which will have a profound impact on the banking fundamentals in 2025. The intensified fiscal policy will support social financing and credit while boosting economic expectations, benefiting pro-cyclical stocks. The broad range of interest rate reductions will put pressure on bank net interest margins in the short term, but high interest deposits are entering a period of concentrated repricing coupled with ongoing regulatory crackdown on high-interest deposit-taking behavior, which will be crucial in protecting bank interest margins in 2025. 2025 will be a year of solidifying bank asset quality under policy support, leading to significant improvements in the expected risks of real estate and local government investment assets. Some types of individual loans which have adequate risk exposure and disposal may also reach a turning point in asset quality. At present, investors should focus on two main investment themes: 1) high dividend yield stocks; 2) improved risk expectations, and types of stocks with strong fundamentals that were less affected by the bond market turmoil in the first quarter. Main points from Orient are as follows: Analyzing financial investments from the balance sheets of banks 1) After rapid expansion from 2015 to 2018, the proportion of financial investments on the total assets of listed banks has increased and stabilized at around 30%, with city commercial banks having the highest dependence on financial investments and state-owned banks having the lowest; 2) From the conversion of basic asset investments, the proportion of standardized assets continues to increase, with interest-bearing bonds taking the dominant position in the long term; 3) The implementation of I9 has had a profound impact on financial investments, mainly reflected in mapping the classification of assets on the bank's profit statement, leading to a passive increase in the proportion of TPL, the attractiveness of OCI investments during interest rate fluctuations, and support through the sale of OCI or AC assets to boost profits; 4) Additionally, the interest rate risk in bank books is being more heavily emphasized. Analyzing financial investments from the profit and loss statements of banks 1) Since 2018, the contribution of interest income from financial investments has remained stable at 20%-25% of total interest income; 2) The contribution of non-interest income from financial investments (as a percentage of total revenue) has fluctuated significantly, currently standing at over 10%; 3) The potential income contribution of financial investment businesses is hidden in other comprehensive income items, and since 2021, banks have been relatively restrained in using OCI to smooth out their profits. Handling bond market fluctuations, how to estimate the impact of financial investments on the profit and loss statement? By referencing DV01, the bank calculates the impact of bond yield fluctuations on TPL fair value changes, with the focal point being the duration of various assets. The results show: 1) AC assets have the longest duration, followed by OCI, with TPL having the shortest. As of 24H1, AC duration is 4.85 years, OCI is 3.97 years, and TPL is 1.93 years; 2) All three types of assets exhibit a lengthening duration, but AC assets are most prominent. Between 19-24H1, the duration of AC assets has lengthened by approximately 9-10 months, OCI by 1-3 months, and TPL by 1-2 months; 3) Assuming that there have been no changes in listed bank TPL investments since December 24, the fair value changes in total TPL investments by the end of February amount to -679 billion yuan, having an impact of approximately -1.2% on revenue. Which banks have a stronger ability to release financial investment performance? And assuming a need to smooth out performance fluctuations, how much OCI needs to be realized? 1) The bank compares the safety cushion level of core Tier 1 capital adequacy ratios after deducting other comprehensive income to assess the space and capacity of banks to release performance through OCI. Overall, state-owned banks and rural commercial banks have the greatest space, especially Industrial and Commercial Bank of China, China Construction Bank, Yunong Rural Commercial Bank, and Shanghai Rural Commercial Bank; Joint-stock banks and city commercial banks have relatively limited release space. 2) If a bank wishes to fully offset the impact of the bond market correction in January and February 2025 on the profit and loss statement and achieve this by disposing of OCI, how much would need to be realized? It is important to note that this is a discussion under an extreme assumption. The results show: If we extend the timeframe to the beginning of 2024 to the end of February 2025, and assuming some OCI assets are not disposed of during this period, listed banks would need to dispose of approximately 2.2 trillion yuan of OCI assets to hedge against the TPL fair value fluctuations in January and February 2025, accounting for 9.7% of OCI balance as of the third quarter of 2024. Risk warnings Unexpectedly tightening monetary policies; fiscal policies falling below expectations; risks associated with calculations.