From the recent adjustments to LPR and deposit rates: every time the central bank lowers LPR twice, the major banks will lower their listed deposit rates twice. Since the beginning of this year, interest rates have been reduced by two rounds, and a new round of deposit rate cuts can be expected.
Zhongtai Securities released a research report saying that the rate cut met expectations, and LPR is tied to 7-day OMO, which further deepens the marketization of interest rates. This 10bp LPR reduction has an impact of about 1bp on bank interest spreads in 2024, and an impact of 0.5pcts/1.1pcts on revenue and pre-tax profits respectively. From the recent adjustments to LPR and deposit rates: every time the central bank lowers LPR twice, the major banks will lower their listed deposit rates twice. Bank stocks have stability and defensiveness, as well as investment properties with high stock dividends and state-owned financial institutions; from an investment perspective, bank stocks are strongly supported by the situation and the bank's fundamentals are stable. Choose a high-quality City Commercial Bank with high certainty of the fundamentals and undervalued valuation.
Zhongtai Securities' main points are as follows:
The rate cut is in line with expectations: the expectation of a rate cut in the United States has increased, and the constraint on exchange rates may weaken, and the domestic economy is still showing a weak recovery. The domestic economy is still in a phase of weak recovery, and the domestic interest rate cut is subject to exchange rates and the interest rate spread of banks. On the one hand, the exchange rate is constrained by the interest rate difference between China and the United States, but the US CPI data from May to June was lower than expected, and the expectation of a rate cut in the United States has increased. The interest rate differential between China and the United States may gradually recover. The pressure on the RMB exchange rate is easing and the constraints on domestic interest rate cuts are weakening. On the other hand, the cost of the liability side of listed banks on the market has decreased by 4bp compared with the previous quarter, and the previous deposit rate cut has already had some effects. Moreover, the moderate reduction in interest rates this time and the rectification of the manual subsidy in the previous period have a bullish effect on the liability cost of the banking industry as a whole, which can play a certain easing role in this rate cut.
LPR is tied to 7-day OMO, which further deepens the marketization of interest rates. In July, MLF remained unchanged, but this time, both 7-day OMO and LPR were lowered by 10bp at the same time. It is expected that LPR will be anchored to the 7-day OMO interest rate thereafter. MLF, as a policy interest rate, will gradually fade in color and function, and domestic policy interest rates will gradually align with international ones. Anchoring to the short-term is beneficial to the more market-oriented pricing of funds.
Reducing or exempting the collateral of MLF further balances the supply and demand of the bond market. This year, the long-term bond yield has fallen rapidly, and the central bank has repeatedly warned of the risks of long-term bond yields, and announced on July 1 that it will conduct national bond borrowing operations to increase the supply of bonds. If the yield of government bonds is too low, it may also lead to accelerated outflow of foreign funds and affect the RMB exchange rate. At present, the number of available collateral bonds that meet the requirements of MLF is small. This periodic reduction of MLF is a continuation of the policy intervention in the bond market, which helps to further balance the supply and demand of the bond market.
The estimated impact of this LPR reduction on banks' interest spreads in 2024 is about 1bp, with impacts on large banks, joint-stock banks, city commercial banks, and rural commercial banks of 1.2/0.7/0.7/0.8bp, respectively. The impact on banks' revenue in 2024 is about 0.5pcts, and the impact on banks' pre-tax profits in 2024 is about 1.1pcts. In terms of revenue, the impacts on large banks, joint-stock banks, city commercial banks, and rural commercial banks are 0.6/0.3/0.3/0.4pcts, respectively; In terms of pre-tax profits, the impacts on large banks, joint-stock banks, city commercial banks, and rural commercial banks are 1.3/0.7/0.7/0.8pcts, respectively.
Interest rates have been reduced twice since the beginning of this year, and a new round of deposit rate cuts can be expected. From the recent adjustments to LPR and deposit rates: every time the central bank lowers LPR twice, the major banks will lower their listed deposit rates twice. On the one hand, the liability side adapts to the downward adjustment of the asset side, and also opens up space for further downward adjustment of the asset side. LPR has been lowered twice since 2024, but the listed deposit rates of major banks have not been lowered since 2024. From the above rules, it can be seen that the listed deposit rate cut may be expected soon.
Investment advice: Bank stocks have stability and defensiveness, as well as investment properties with high stock dividends and state-owned financial institutions; from an investment perspective, bank stocks are strongly supported by the situation and the bank's fundamentals are stable. Choose a high-quality City Commercial Bank with high certainty of the fundamentals and undervalued valuation.
The first is to continue to recommend Bank of Jiangsu (600919.SH), Jiangsu Changshu Rural Commercial Bank (601128.SH), Rui Feng Bank (601528.SH), Chongqing Rural Commercial Bank (601077.SH), Shanghai Rural Commercial Bank (601825.SH), Bank of Nanjing (601009.SH) and the Bank of Qilu (601665.SH).
The second is to choose large banks: Agricultural Bank of China (601288.SH), Bank of China (601988.SH), Postal Savings Bank of China (601658.SH), Industrial and Commercial Bank of China (601398.SH), China Construction Bank (601939.SH), and Bank of Communications (601328.SH), which benefit from weak economic recovery and debt-to-equity swaps and have high dividend yields.
The third is to choose core assets in banks: Bank of Ningbo (002142.SZ), CM Bank (600036.SH), and Industrial Bank (601166.SH), which are expected to benefit if economic recovery expectations are strong.
Risk Warning: Economic downturn exceeds expectations; industry data calculation deviation risk; deviation from actual situation due to insufficient sample statistics risk; the public information used in the research report may have risk of information lag or untimely updates.