CITIC Securities: Second-quarter monetary policy report emphasizes countercyclical adjustment, clear bottom location for banking stocks, can be gradually allocated.

CITIC SEC released a research report on August 17th stating that the People's Bank of China (PBOC) released the "China Monetary Policy Execution Report for the Second Quarter of 2023". The report discusses the rationality of commercial banks maintaining a reasonable level of profit and net interest margin, reflecting the monetary authority's dual focus on economic stability and financial stability, and helping to strengthen market expectations for banks' continued stable and sound operation. In terms of sector investment, the current position of bank stocks is clear and can be gradually considered for allocation. Key focuses in the future include the implementation of targeted debt reduction models and the progress of financial work conferences. The comments from CITIC SEC are as follows: Quantity-based policy: Better play a dual role in total and structural function. The overall orientation of this monetary policy report is consistent with the spirit of the Central Political Bureau meeting in late July, focusing on: 1) More proactive total policy, the report for the first time mentioned "continuously promoting the continued improvement of economic operation, continuous enhancement of endogenous motivation, continuous improvement of social expectations, and continuous resolution of hidden risks." It also mentioned "stably supporting the recovery and development of the real economy", it is expected that the central bank will still have room for action in terms of loose monetary and credit policies in the next stage; 2) Structural tools, the report puts more emphasis on "promotion", the requirements for structural tools to "focus on key areas, be reasonable and moderate, have both progress and withdrawal" remain unchanged. It also highlights the future role of structural tools in the areas of green finance, technology, and inclusive old-age care. At the same time, it proposes "for areas where structural contradictions are still prominent, the implementation period can be extended, and if necessary, new tools can be created." Interest rate policy: Pay attention to the guidance direction under the changes in statements. Compared with the previous quarter, some statements regarding deposit and loan interest rates and the policy rate system in this report are worth noting: 1) Loan interest rates: "Promote the stabilization and slight reduction of comprehensive financing costs for enterprises and household credit." The interest rates for new loans in June decreased by 15 basis points compared to March, with general loans (down 12 bps) and bill loans (down 64 bps) both having a downward impact, while mortgage rates (down 3 bps) showed a marginal slowdown, reflecting that rate adjustments in some regions have basically taken place. The mention of cost reduction in loans has changed from "personal consumer credit" in the previous report to "household credit" in this report. This may indicate that reducing mortgage loan rates is also one of the current target directions. 2) Deposit interest rates: "Effectively play the role of the market-based adjustment mechanism for deposit interest rates." Compared with the previous quarter, the statements regarding deposit interest rates in this report are basically the same. In addition, the report mentioned, "In June, commercial banks made a second active adjustment to the deposit benchmark interest rate according to their own operational needs and market supply and demand, further improving the degree of marketization of deposit interest rates and the efficiency of interest rate transmission." The bank predicts that there is still a possibility of another round of adjustments in deposit interest rates following the LPR rate cut. 3) Market interest rates: Weaken the statement of "guiding market interest rates to fluctuate around policy interest rates." While the previous two quarterly reports mentioned "guiding market interest rates to fluctuate around policy interest rates", this report does not have any related statements. The bank predicts that under the guidance of "maintaining reasonable and sufficient liquidity", interbank liquidity will continue to be relatively abundant in the future, which will help keep market interest rates at a moderate "discount" level compared to policy interest rates. Credit policy: Supportive of both quantity and structure. 1) In terms of credit quantity, the report includes the statement "effectively play the positive role of finance in promoting consumption, stabilizing investment, and expanding domestic demand" and weakens the content of "grasping the pace and intensity of credit expansion." It is expected that after the decline in credit expansion levels in July, the central bank may strengthen credit expansion guidance in the next stage. 2) In terms of credit structure, there have been significant changes in the description of real estate credit, mainly implementing the spirit of the Political Bureau meeting, mentioning "maintaining stable and orderly real estate financing" and "implementing differentiated policies with a well-stocked policy toolbox to better meet the rigid and improving housing needs of residents". It is expected that there is still great room for optimization in future real estate financial policies. Bank operations: Focus on the positive statements on "reasonable profit" and "risk resolution". 1) In terms of bank profits, the report's first column is titled "Taking a Reasonable View of the Profitability of Commercial Banks in China" and elaborates on the reasons why commercial banks need to maintain a reasonable level of profit and net interest margin. The bank believes that from the perspective of supporting the sustainability of the real economy, the reasonable growth rate of bank profits is beneficial for internal capital replenishment (external replenishment is to some extent restricted), which implies the necessity and rationality for banks to maintain a moderate pace of profit growth. 2) In terms of risk resolution, the report for the first time mentions "coordinating and coordinating financial support for local government debt risk resolution work, steadily promoting the reform and risk reduction of high-risk small and medium-sized financial institutions." The bank believes that from the perspective of the supply and demand of local government debt, the risks of hidden local debt and risks of small and medium-sized financial institutions may be two sides of the same coin. Dual promotion may help solve the debt risk problem in a "fundamental" way. Investment strategy: The core of the second quarter monetary policy report is to strengthen countercyclical adjustment and policy reserves, and the statements on currency total, structure, and interest rates are more positive. It is expected that the monetary policy will continue to maintain a proactive posture in coordination with fiscal and industrial policies. In addition, the report discusses the rationality of commercial banks maintaining a reasonable level of profit and net interest margin in a special column, reflecting the monetary authority's dual focus on economic stability and financial stability and helping to strengthen market expectations for banks' continued stable and sound operation. In terms of sector investment, the current position of bank stocks is clear, and gradual allocation can be considered. Key focuses in the future include the implementation of targeted debt reduction models and the progress of financial work conferences. Stock recommendations: 1) CKH HOLDINGS, with clear investment returns brought by valuation position, including strong certainty of future three-year earnings growth and low valuation of institutionally overweighted banks; (2) companies entering the asset quality inflection point cycle with valuation repair. Risk factors: Sharp decline in macroeconomic growth, unexpected deterioration of bank asset quality; significant fluctuations in regional economic outlook; companies' strategic advancement falling short of expectations; unexpected fiscal, industrial, or monetary policies.