CITIC SEC: "Stable returns" + "increased funding allocation" empower the investment value of the banking sector.

CITIC SEC released a research report stating that "stable return" assets have the characteristics of low volatility, low drawdown, and continuous income. Based on the experience of US stocks, the core logic of related targets lies in the dual stability of profit and dividends. The business models are mostly characterized by "weak economic cycle attributes + franchise operation and customer stickiness + stable capital expenditure." Referring to overseas markets, the financial conditions of banks and power companies in the A-share market in the past 15 years best meet the criteria for "stable return." Currently, the foundation of the stable return in the banking sector is further strengthened. This is due to contributions from macroeconomic policies and regulatory policies for profit stability, as well as increased holdings from insurance funds, public funds, and AMC companies, which further enhance the "stable return" attribute. In terms of individual stocks, it is expected that trading funds in the next stage will focus on undervalued varieties, while investment funds will continue to focus on beta varieties. The main views of CITIC SEC are as follows: Insights from overseas markets: the "criteria" and "essence" of stable return equity assets. 1) "Criteria": Three-dimensional screening of "stable return" assets in US stocks. Based on three conditions of volatility (lowest 20th percentile), maximum drawdown (lower than the index), and annualized return rate (higher than the index), there are a total of 15 companies in the S&P 500 component stock that meet the criteria, mainly distributed in industries such as electrical gas, chemical products, insurance, and business services. 2) "Essence": Performance and dividend stability become core factors. Over the past 10 years, the net profit CAGR of the 15 companies is distributed in the 40%-60% percentile in the S&P 500, while the ROE is distributed in the 40%-80% percentile. The absolute growth rate level is moderate, but more importantly, the standard deviation of ROE, EPS, and DPS of related companies are mostly in the top 40th percentile, stability becomes the determining factor. 3) "Essence": Business models become the basis for financial and return stability. The public utilities, insurance companies, and consumer goods production companies in the United States often have characteristics of weak economic cycle properties + franchise operation and customer stickiness + stable capital expenditure, thereby meeting the conditions for performance and dividend stability. Implications for the domestic market: initial exploration of A-share stable return assets based on financial retrospective. Referencing the financial characteristics of "stable return" stocks in US stocks, profiling and screening of industry sectors of A-shares based on historical data. 1) Dimension 1: Stability of ROE. Over a 10-year period, the household appliances, banking, and food and beverage industries have both high profitability and stability characteristics, with mean ROEs of 16.8%, 11.9%, and 19.3% respectively, and standard deviations ranked 1st, 5th, and 6th among listed industries. 2) Dimension 2: Stability of dividends and dividends. Over the past 10 years, the banking, construction, and non-banking industries have the highest stability in dividends in A shares, with the highest average dividend yield in the banking, coal, and oil industries. 3) The four industries in the A-share market that best meet the financial conditions of "stable return". Considering six dimensions of ROE absolute value and stability, dividend rate absolute value and stability, and dividend rate absolute value and stability, the historical financial performance of household appliances, banking, food and beverage, and electric power and utilities is the most suitable. However, given the different stages of economic development in China and the United States, relevant industries in the future also need to be tested in a longer business cycle. Comparison of Chinese and American banks: Stability of performance in Chinese listed banks is advantageous. Compared with the S&P 500 component banks and the 16 listed banks in A shares, domestic banks have stronger stability in profit growth rate, ROE, and cash dividend ratio, mainly due to: 1) Differences in monetary policy: Compared to the United States, the Federal Reserve's use of interest rate policy is more extreme, and the large adjustments to short-term policy rates increase the interest rate risk and interest rate spread volatility in the banking system, leading to greater profit volatility. 2) Differences in regulatory policies: In the US banking regulatory system, there are no strict regulatory requirements for "loan-to-deposit ratio" and "provision coverage ratio," and impairment provisions based on expected losses often lead to over-provisioning. 3) Differences in operating strategies: The diversified business model makes US-listed banks more closely tied to the capital market, and the relatively abundant capital model also allows for more flexibility in dividend policies. Outlook: Investment in domestic bank stocks from the perspective of stable returns. On the basis of relatively stable traditional financial indicators and dividend levels, the fundamental and capital market attributes of the banking industry are further solidifying the conditions for stable returns in the sector. 1) Fundamentals: Creating conditions for stable returns from top to bottom. Considering current macroeconomic policies, where systemic risk bottom lines are clear, monetary policy is more focused on stabilizing interest rate spreads, financial regulations enhance volatility management, and shareholder factors strengthen risk resistance, all contribute to the relative stability of the banking industry's performance. 2) Capital market: Strengthens the foundation for stable returns. Against the background of "asset shortage," bank stocks are increasingly becoming an important "alternative" for asset management institutions' fixed income portfolios. In the next stage, it is recommended to focus on the impact of three types of institutional funding allocations: Insurance funds, especially OCI account funds, continue to increase holdings of high-dividend banks; Public funds are underweight in high-quality weighted varieties; AMC companies increase financial investments in undervalued banks. Risk factors: Worsening of bank asset quality beyond expectations; unfavorable changes in regulatory and industry policies.