- 2024-08-25
- News
Enhanced Quarterly Growth in Bank Profitability
On November 22nd, the National Financial Regulatory Administration released the key regulatory indicators for commercial banks in the third quarter of 2024. The data shows that commercial banks achieved a net profit of 1.9 trillion in the first three quarters, with an average return on equity of 8.77%; the non-performing loan ratio was 1.56%, essentially unchanged from the end of the previous quarter. As fiscal and monetary policies strengthen counter-cyclical adjustments to promote economic recovery, the bank credit allocation and risk resistance capabilities are expected to benefit from the national capital increase. At the policy inflection point, positive factors in the bank's fundamentals continue to accumulate, especially performance repair and capital replenishment, which will continue to support the bank's dividend attributes.
The current bank sector is still in a relatively underweight state, and as the dividend yield continues to increase and the dividend strength continues to increase, the dividend asset attribute is prominent.
Commercial banks' profit growth rate slightly increased, and state-owned banks improved significantly on a quarter-over-quarter basis.
Commercial banks' net profit for the first three quarters of 2024 increased by 0.5% year-on-year, a slight increase of 0.1 percentage points from 24H1. Looking at the institution category, the profit growth rates for state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks for the first three quarters were -1.3%, 1.2%, 3.4%, and 2.9%, respectively. The decline for state-owned banks narrowed by 1.6 percentage points from 24H1, while the profit growth rates for joint-stock banks, city commercial banks, and rural commercial banks decreased by 0.2, 0.9, and 3.1 percentage points from 24H1, respectively.
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Looking at the "quantity," "price," and "risk" indicators of bank operations:
(1) Insufficient effective credit demand, coupled with the policy orientation of revitalizing existing stocks and "squeezing out water," has shifted the credit expansion model from "high speed" to "high quality." The overall credit allocation presents a trend of "quantity reduction and price decrease," with non-credit assets providing strong support for balance sheet expansion; as of the end of 24Q3, the year-on-year growth rates of total assets and loans of commercial banks were 8% and 8.1%, respectively, changing by 0.7 and -0.7 percentage points from the previous quarter;
(2) The net interest margin continued to operate under pressure, but the narrowing pressure eased, with a net interest margin of 1.53% for 1-3Q, slightly decreasing by 1 basis point from 24H1, and decreasing by 20 basis points year-on-year;
(3) The overall asset quality remained stable, with the non-performing loan ratio and attention ratio of commercial banks as of the end of 24Q3 being 1.56% and 2.28%, respectively, with the non-performing ratio remaining unchanged from the previous quarter, and the attention ratio increasing by 6 basis points from the previous quarter. The forward-looking risk indicators fluctuated slightly, which may be affected by factors such as the continued relatively high pressure on retail non-performing loan generation.
Looking at the financial reports of listed banks, the revenue and net profit attributable to the parent company of listed banks for 1-3Q increased by -1.1% and 1.4% year-on-year, respectively, improving by 0.9 and 1 percentage points from 24H1. Looking at the performance driving factors, ① scale expansion, net other non-interest income, and provisions were the main contributors, driving profit growth by 18.6, 7.5, and 4.4 percentage points, respectively; ② on a quarter-over-quarter basis, factors boosting performance included scale expansion and stronger contributions from non-interest income; factors dragging down performance included the deepening negative drag from the interest margin and expenses, and the narrowing positive contribution from provisions.
Credit demand still needs to be repaired, and non-credit assets boost asset growth rate slightly.
At the end of 3Q, the credit growth rate decreased by 0.6 percentage points quarter-over-quarter, and non-credit assets provided strong support for the scale. As of the end of 24Q3, the total asset growth rate of commercial banks increased by 0.7 percentage points from the end of 2Q to 8%. Looking at the asset allocation structure, the year-on-year growth rates of loans and non-credit assets were 8.1% and 8%, respectively, changing by -0.7 and 2.6 percentage points from the end of 2Q; the incremental amounts of loans and non-credit assets in the single quarter of 3Q were 2.3 trillion and 4 trillion, respectively, with year-on-year decreases of 1.1 trillion and increases of 3.9 trillion, respectively; the proportion of existing loans was 57.5%, decreasing by 0.4 percentage points from the end of 2Q and increasing by 0.4 percentage points from the beginning of the year, with the proportion of credit assets generally stable throughout the year.
Since the beginning of this year, loan allocation has continued to be suppressed by insufficient effective demand, with credit allocation dominated by the public sector, and the demand for bill discounting at the end of the month and quarter increased. Since the press conference on September 24th, a "package" of supportive policies has been continuously introduced. The financial data for October not only shows the continuity of the insufficient effective demand problem but also reflects some marginal improvements, such as the alleviation of mortgage prepayment pressure and the "stable quantity and lower price" of retail loans.
Looking ahead, fiscal factors may be the main plot affecting future credit expansion. On the one hand, under the background of local debt resolution, low-interest bonds replacing high-interest debt may exert some pressure on the existing public loans in the banking system; but at the same time, with the resolution of hidden debts and the repayment of existing debts, the economic cycle is expected to be unblocked, driving further repair of financing demand. On the other hand, as the counter-cyclical adjustment of fiscal policy intensifies and the intensity of fiscal expenditure increases, it will drive the repair of domestic demand; at the same time, with the disbursement of funds from government bonds issued earlier, it will drive the financing demand for related project support, providing some support for loan growth.
Interest margin narrows quarter-over-quarter, and liability cost management alleviates pressure.
The net interest margin disclosed by commercial banks for 1-3Q is 1.53%, slightly decreasing by 1 basis point from 24H1, and decreasing by 20 basis points from the same period last year. Looking at the types of banks, the interest margins for state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks are 1.45%, 1.63%, 1.43%, and 1.72%, respectively. The interest margins for state-owned banks and city commercial banks decreased by 1 basis point and 2 basis points quarter-over-quarter from 24H1, while the interest margins for joint-stock banks and rural commercial banks remained unchanged from 24H1.
Looking at the financial reports of listed banks, the calculated net interest margin for listed banks for 1-3Q is 1.51%, decreasing by 2 basis points from 24H1. On the asset side, the calculated yield on interest-earning assets is 3.39%, decreasing by 5 basis points quarter-over-quarter from 24H1. Insufficient effective credit demand suppresses the pricing of new issuances, and the maturity and re-pricing of existing loans exacerbate the downward pressure on the asset side yield. In October, the new issuance rates for public and mortgage loans were 3.5% and 3.15%, respectively, decreasing by 13 basis points and 17 basis points month-on-month, and the asset side pricing has not yet reached an inflection point. On the liability side, the calculated cost rate of interest-bearing liabilities is 2.05%, decreasing by 4 basis points quarter-over-quarter from 24H1. The main banks have twice concentrated on lowering the deposit listed interest rate in July and October, and the effectiveness of cutting interest rates for demand varieties is immediately apparent, and the cost improvement effect of cutting interest rates for time deposits will gradually appear with re-pricing.
Overall, as stabilizing the interest margin becomes increasingly important for the stability of the banking system, the pricing pressure on the asset side will be partially or fully transmitted through liability adjustment, and the effectiveness of the transmission depends on the ability to control liability costs. Looking ahead to 4Q, the one-time reduction in existing mortgage interest rates in October will still be based on the LPR at the end of 2023, and the 60bp reduction in LPR this year will mainly be reflected at the beginning of next year. In addition, since October, the deposit listed interest rate has been reduced, and the pricing of interbank deposits has been further standardized. It is not ruled out that some banks' interest margins may stabilize stage by stage in 4Q, and the pressure of further narrowing of the interest margin will be postponed to 25Q1.
V. Bank asset quality is generally stable, and the growth rate of risk-weighted assets increased year-on-year.
The overall bank asset quality is stable, with the non-performing ratio remaining unchanged from the previous quarter at 1.56%. As of the end of 24Q3, the balance of non-performing loans of commercial banks was nearly 3.38 trillion, an increase of 37.1 billion from the end of 2Q; the non-performing loan ratio of commercial banks was 1.56%, unchanged from the end of 2Q; the attention loan ratio was 2.28%, an increase of 6 basis points from the end of 2Q. Looking at the types of banks, the non-performing ratios for state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks were 1.25%, 1.25%, 1.82%, and 3.04%, respectively. The non-performing ratios for state-owned banks and city commercial banks increased by 1 basis point and 5 basis points from the end of 2Q, respectively, while the non-performing ratio for joint-stock banks remained unchanged from the end of 2Q, and the non-performing ratio for rural commercial banks decreased by 10 basis points from the end of 2Q.
The provision coverage ratio remains stable near 290%. As of the end of 24Q3, the balance of loan loss provisions of commercial banks was nearly 7.1 trillion, an increase of 83 billion from the end of 2Q; the provision coverage ratio was 209.5%, a slight increase of 0.2 percentage points from the end of 2Q, remaining stable near 290%; the loan-to-provision ratio was 3.27%, a slight increase of 1 basis point from the end of 2Q; looking at the types of banks, the provision coverage ratios for state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks were 250.3%, 217.1%, 189%, and 148.8%, respectively. The provision coverage ratios for joint-stock banks and rural commercial banks increased by 0.5 and 5.6 percentage points from the end of 2Q, respectively, while the provision coverage ratios for state-owned banks and city commercial banks decreased by 3.5 and 3.4 percentage points from the end of 2Q, respectively.
As of the end of 24Q3, the growth rate of risk-weighted assets of commercial banks increased by 3.8% year-on-year, a decrease of 0.5 percentage points from the end of 2Q. As of the end of 24Q3, the core tier 1 capital adequacy ratio, tier 1 capital adequacy ratio, and capital adequacy ratio of commercial banks were 10.86%, 12.44%, and 15.62%, respectively, increasing by 12, 6, and 9 basis points from the end of 2Q.
Looking at the types of banks, the capital adequacy ratios for state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks were 18.26%, 13.8%, 12.86%, and 13.26%, respectively. The capital adequacy ratio for state-owned banks slightly decreased by 5 basis points from the end of 2Q, while the capital adequacy ratios for joint-stock banks, city commercial banks, and rural commercial banks increased by 19, 15, and 18 basis points from the end of 2Q, respectively.
Bank fundamentals accumulate positive factors, and dividend value investment opportunities are highlighted.
(1) The proportion of banks in the heavy portfolio slightly increased in the third quarter, and dividend assets are still favored.
According to the public fund's 2024Q3 heavy portfolio holding data, the underweight proportion of the bank sector is 8.46%, narrowing by 0.69 percentage points quarter-over-quarter. The proportion of heavy portfolio holdings is 2.79%, an increase of 0.02 percentage points from the previous quarter, ranking 12th in the entire industry, up 1 place from the previous quarter. The proportion of holdings for joint-stock banks and rural commercial banks increased by 0.04 and 0.01 percentage points quarter-over-quarter, respectively, while the proportion for state-owned banks and city commercial banks decreased. In terms of individual stocks, the high dividend strategy is still favored, and the attention to some joint-stock banks and regional banks is increasing.
(2) Bank dividend yield increases, and the dividend strength is enhanced.
The interim dividend plans have been announced one after another, and the national capital increase for large banks will continue to support the dividend value of banks. The new "Nine National Articles" propose to increase the incentive for high-quality dividend companies, take multiple measures to promote the increase of dividend yield, and enhance the stability, sustainability, and predictability of dividends. Many banks have implemented interim dividends for the first time this year, and the dividend rate has increased steadily. So far, 20 banks have announced interim dividend plans, with a total dividend amount of over 250 billion yuan, and an average dividend rate of 26.2%; among them, the six major state-owned banks have a total dividend of over 200 billion yuan, with an average dividend rate of nearly 30%. With the national capital replenishment for the six major banks, the core tier 1 capital adequacy ratio of the large banks will be further improved in the short term, providing additional support for the stable dividend value of the large banks.
(3) The valuation of the bank sector is particularly cost-effective.
The valuation of the bank sector is still at a relatively low level historically, with high cost-effectiveness and good configuration value. As of November 25, 2024, the PB of the SWS first-level - Bank sector is 0.49X, and the PB of the SWS second-level - state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks is 0.53X, 0.47X, 0.49X, and 0.56X, respectively, located at the 14.2%, 26.2%, 13.1%, 6.3%, and 22.6% percentiles in the past ten years.
Overall, combining the recent financial regulatory administration's 3Q key regulatory indicators for commercial banks and the third-quarter reports of listed banks, the operating fundamentals of commercial banks are robust, and the overall profit growth rate of listed banks is better. From the perspective of capital, the main force in configuring banks this year lies in index funds represented by the national team, insurance funds, and industrial capital, and more capital may configure high dividends in the future. Against the background of the current repair of bank revenue and net profit, the narrowing of the interest margin decline, and the gradual emergence of the effect of liability cost optimization, the risk resistance capability of banks is expected to benefit from the national capital increase. Fiscal and monetary policies strengthen counter-cyclical adjustments to promote economic recovery. At the policy inflection point, positive factors in the bank's fundamentals accumulate.
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