According to Zhongtai Securities, bank stocks have the attributes of stability and defensiveness, as well as high dividends and the investment properties of state-owned financial institutions. From an investment perspective, bank stocks have strong support, and the fundamentals of banks are stable. Choose high-quality rural commercial banks with high certainty of fundamentals and low valuation, such as Bank of Jiangsu (600919.SH). If there is a weak economic recovery and debt conversion benefits, select large banks with high dividend yield, such as Agricultural Bank of China (601288.SH). If there is a strong expectation of economic recovery, choose core bank assets, such as Bank of Ningbo (002142.SZ).

Zhongtai Securities' main points are as follows:

Summary of 1H24 financial reports: Revenue growth under pressure, Profit growth rate turned positive, performance differentiated.

1. Revenue: Industry YoY -2.2% (1Q24 YoY -1.9%), marginal decline compared to the first quarter. The main reason is that the growth rate of scale has slowed down, dragging the performance. The YoY decline in interest rate spread has narrowed. Large banks, joint-stock banks, city commercial banks, and rural commercial banks YoY -3%, -3.1%, 4.8%, and 3.4% respectively. The decline of large banks has a wider range, while the decline of joint-stock banks has narrowed. The growth rates of city commercial banks and rural commercial banks have both declined. The decline of large banks is mainly due to the slowdown in scale, while for city commercial banks, it is mainly due to the decrease in contribution from investment income and fair value gains. 2. Profit: Industry YoY +0.4% (1Q24 YoY -0.6%), profit growth rate turned positive. The marginal contribution of provisions to profit release has increased. Large banks, joint-stock banks, city commercial banks, and rural commercial banks YoY -1%, 1%, 5.4%, and 6.2% respectively (1Q24 YoY -2%, 0%, 7.1%, and 1.2%). Looking at individual stocks, among large banks, Agricultural Bank of China has turned positive in profit growth, while the others have negative growth. Stocks with high growth in performance: net profit growth rate of more than 10% and matching high growth (5%+) on the revenue side include Hangzhou Bank, Changshu Bank, Qilu Bank, Sunan Bank, Ruifeng Bank, Qingdao Bank, Jiangyin Bank, and Bank of Jiangsu.

Analysis of 1H24 financial reports: Scale and other non-interest factors are the main factors supporting income. Net interest income declines, the decline in net fee income widens, and other non-interest income remains high.

1. Decomposition of net interest income YoY: -3.4%, marginal decline of 0.4 percentage points. Both interest rate spread and scale have dragged down net interest income. YoY growth rate of interest-bearing assets is 7.3% (vs 1Q24 YoY 9.5%), continuing to slow down; YoY decline in net interest margin is 21 basis points (vs 1Q24 YoY -22 basis points), with a slight narrowing of the YoY decline by 1 basis point. In terms of absolute decline, joint-stock banks have the largest decline in net interest income, mainly due to the weak absolute growth rate of scale compared to other sectors. In terms of marginal situation, the decline of state-owned banks has widened, mainly due to a greater slowdown in the expansion speed of scale. The YoY growth rate of interest-bearing assets of state-owned banks is +7.9%, a 3.1 percentage point decline compared to 1Q24.

2. Net interest margin decomposition: -4bp month-on-month; asset drag, liability support. Asset pricing -11bp; liability cost -7bp. (1) Asset side: pricing and structure both have drag. The Q2 monetary policy report of the central bank disclosed that the weighted average interest rate for new loans issued in June was 3.68%, a decrease of 31bp from March; in terms of structure, the proportion of loans increased by 0.6 percentage points compared to Q1, but among them, the proportion of corporate and retail loans decreased by 0.1 and 0.7 percentage points respectively, while the proportion of bills increased by 0.8 percentage points, which dragged down the asset yield. (2) Liability side: the efficiency of deposit rate cuts is released + active liability cost reduction. First, the regularization of deposits continues, but it is expected that the multiple deposit rate cuts last year have released some easing effects. Second, the continued easing leads to a reduction in active liability costs (according to the calculation, the interbank certificate of deposit rate of listed banks in the second quarter of 24 decreased by 20bp compared to Q1).

3. Industry non-interest income increased by +1.3% year-on-year, with a continued widening of the fee reduction and maintenance of high growth in other non-interest areas. Fee income decreased by 12% year-on-year (VS 10.3% year-on-year decrease in the first quarter of 24), showing an increasing reduction. Other non-interest income: +22.8% year-on-year (VS +22.7% year-on-year in the first quarter of 24), with marginal weakening of growth in various sectors except for large banks, but still maintaining a high growth rate of over 30%.

4. Asset quality breakdown analysis: trading time for space, maintaining prudence; continuous improvement in corporate, while a slight increase in retail non-performing loans. (1) Overall, the industry's cumulative annualized non-performing loan generation rate in the first half of 24 was 0.71%, an increase of 9bp month-on-month and 1bp year-on-year, remaining stable overall. The non-performing loan rate and the proportion of special-mention loans are both at historically low levels: the industry's non-performing loan rate is 1.25% in the first half of 24, unchanged from the previous period; the proportion of special-mention loans increased by 5bp year-on-year to 1.72%, slightly higher year-on-year, but down 1bp from the beginning of the year. In terms of overdue loans, the overdue rate of listed banks in the first half of 24 increased by 10bp to 1.4% from 2023, with new retail loan overdue still in the exposure period. In terms of provisions, the provision coverage ratio increased month-on-month, the loan-to-coverage ratio remained stable, and there is still room for profit from provisions. (2) Specifically, the non-performing loan rate for corporate loans continued to improve, decreasing by 12bp to 1.42% from the beginning of the year; among them, the non-performing loan rate for real estate switched from an increase to a decrease, decreasing by 22bp to 3.55% from the beginning of the year; the non-performing loan rate for manufacturing decreased by 18bp to 1.36% from the beginning of the year; the non-performing loan rates for various retail loans all increased slightly, with the mortgage non-performing loan rate increasing by 9bp to 0.55% from the beginning of the year, the credit card non-performing loan rate increasing by 12bp to 2.25% from the beginning of the year, the consumer loan non-performing loan rate increasing by 7bp to 1.45% from the beginning of the year, and the operating loan non-performing loan rate increasing by 16bp to 1.26% from the beginning of the year. (3) Looking at the sectors, large banks have strong prudence, with marginal improvements in the non-performing loan rate and special-mention loan rate, an increase in provision coverage ratio and loan-to-coverage ratio, and marginal changes in key indicators better than other sectors; in terms of non-performing loan recognition, large banks also have the strictest measures.

5. Dividends: Mid-term dividends have been distributed by multiple banks. Looking at different sectors, except for Postal Savings Bank of China, mid-term dividend plans for large banks have all been distributed, with dividend ratios all around 30%; among joint-stock banks, the mid-term dividend plans for China CITIC Bank, China Minsheng Bank, Huaxia Bank, and Ping An Bank have been distributed, with slightly lower dividend ratios than those of large banks; the dividend plans for city commercial banks have not been distributed yet, and will be announced separately; among rural commercial banks, the mid-term dividend plan for Shanghai Rural Commercial Bank has been distributed, with a dividend ratio of 33.07%.

Three, Outlook: The impact of the next stage of policies is significant, potentially further exploring the bottom.

1. Net interest income: There is still pressure on interest margins, with a continued downward trend in overall asset pricing, the possibility of further reductions in deposit rates, and liability support for interest margins. 2. Fee income: It is expected to gradually stabilize in the second half of the year under the low base of fee income. 3. Other non-interest income: It is expected that other non-interest income will continue to provide positive support for banks in the second half of the year, but the growth rate may slow down marginally, continuing the trend of the second quarter.

Risk warning:

Economic downturn exceeds expectations; financial supervision exceeds expectations; research report information is not updated in a timely manner.