The Zhitong Finance App learned that Huachuang Securities released a research report saying that the current economic data has bottomed out and fluctuated upward, and incremental capital is also showing positive signs. It continues to be optimistic about the bank's absolute earnings performance, while at the same time optimistic about the market performance of insurance and brokerage firms under emotional recovery brought about by increased holdings. Considering that current sector valuations fully reflect the market's pessimistic expectations for the economy and real estate in the early stages, it is expected that they will be repaired in the future. The current policy statement is positive, and confidence can moderately take the lead. Looking at the medium to long term, as bank operations gradually return to normal and reforms continue to advance, the profit center of the industry is expected to return to the value range and is optimistic about the performance and profit level of high-quality banks under market-based competition.

Incident: On the evening of October 11, the four major state-owned banks collectively issued an announcement regarding the controlling shareholder's increase in the Bank's shares. Huijin increased its A-shares holdings of the Bank of China, Agricultural Bank, Industrial and Commercial Bank by 24.89 million shares, 37.27 million shares, 27.61 million shares, and 18.38 million A-shares, and plans to continue to increase the Bank's shares in the secondary market within the next 6 months (starting from the date of this increase).

The main views of Huacheng Securities are as follows:

After a lapse of 10 years, Huijin once again directly increased its holdings of four major banks in the secondary market. On the first day of this increase in holdings, the total capital scale was 500 million yuan.

Huijin previously carried out five rounds of secondary market share increases for the four major banks. The first five were 2008/9/23, 2009/10/9, 2011/10/10, 2012/10/12, and 2013/6/14 (see Table 1 for details). This time, Huijin directly increased its holdings in the secondary market after a lapse of 10 years. According to the closing price on October 11, Huijin increased its holdings of ICBC, Agricultural Bank, Bank of China, and China Construction Bank by 1.30, 1.36, 0.94, and 117 million yuan respectively, for a total increase of 477 million yuan.

Behind the increase in Huijin's holdings: long-term undervaluation of bank stocks and the divergence of prudent fundamentals.

The overall profit of commercial banks has remained relatively stable in the past 5 years. In 2018-2022, they achieved a total net profit of 1.83, 1.99, 1.94, 2.18, and 2.30 trillion yuan. Of these, the net profit industry's contribution of the four major banks stabilized at around 50%. Industry ROE has declined somewhat since 2020 in the context of policies guiding asset-side concessions, but the overall ROE has remained at the level of 10-11%, and the ROE of the four major banks has remained at the level of 10-12%. Meanwhile, the banking sector's PB valuation has declined all the way from 0.95X in early 2018 to 0.47X at present. There is a divergence between the industry's stable profit level, stable dividend level, and continuing downward valuation level.

The entry of incremental capital is expected to drive continued recovery in bank stock valuations.

As of October 11, 2023, the PB of the banking sector was 0.47X, which is at the level of 2.15% of the past 10-year history. As of the end of the second quarter of 2023, bank public fund holdings were 2.1%. Currently, sector holdings and valuations are at historically low levels. Since September, bank shareholders or executives have successively increased their bank shares. Among them, Bank of Communications, Bank of Shanghai, Bank of Beijing, Bank of Xi'an, and Ruifeng Bank have increased their holdings for executives, while Bank of Jiangsu and Qilu Bank have increased their shareholders' holdings. From the intensive increase in the holdings of small and medium-sized bank shareholders and executives in September to the increase in Huijin's holdings of the four major banks in October, they all reflect to a certain extent the shareholders' confidence and support for the bank's subsequent stable operation. The entry of incremental capital is expected to drive the continued restoration of bank stock valuations.

Individual stock level: Before economic expectations stabilize and improve, banks with undervalued and high dividends are more optimistic. It is recommended to focus on the Bank of Jiangsu (600919.SH) and major state-owned banks. The implementation of the policy has spread to the extent that after economic expectations have clearly rebounded, we are more optimistic about the resilience of small and medium-sized banks with high performance certainty, and Hakuba, which fell above the previous period. It is recommended to focus on Bank of Ningbo (002142.SZ), China Merchants Bank (600036.SH), Changshu Bank (601128.SH), and Ruifeng Bank (601528.SH).

Risk warning: As downward pressure on the economy increases, there are still concession requirements on the asset side. Urban investment and real estate risk exposure and credit investment fell short of expectations.