According to Futu Securities' research report, the profitability of banks has marginally improved, the narrowing of interest rate spreads, and the gradual optimization of debt costs are gradually being realized. The implementation of the "five major articles" is progressing, with a high focus on credit provision in key areas, promoting the optimization of credit structure. The reduction of deposit benchmark interest rates in July further benefits the compression of debt costs, which supports the improvement of interest rate spreads. At the same time, the focus remains on preventing and resolving financial risks, which helps improve bank asset quality and risk expectations. In the current environment of asset shortage, I remain bullish on the value of the banking sector and maintain a recommended rating. I focus on two main themes: (1) State-owned banks that benefit from the issuance of ultra-long-term special government bonds and stable dividend payout ratios, such as Industrial and Commercial Bank of China (601398.SH) and China Construction Bank (601939.SH); (2) High-quality small and medium-sized banks with stable performance growth, such as Bank of Jiangsu (600919.SH).

The main viewpoints of Galaxy Securities are as follows:

Revenue continues to decline, and the growth rate of net income has marginally improved.

In the first half of 2024, the operating income of listed banks decreased by 1.95% year-on-year; net income attributable to shareholders increased by 0.37% year-on-year; and ROE was 11.42%, a decrease of 0.68 percentage points compared to the same period last year. In the second quarter of 2024, the operating income of listed banks decreased by 2.18% year-on-year; net income attributable to shareholders increased by 1.46% year-on-year, returning to positive growth compared to the previous quarter. The overall performance of listed banks is relatively weak, mainly affected by the pressure on net interest income and mid-income. Other non-interest income, which is primarily core investment income, performed relatively well and contributed to the performance. The provision pressure has eased, forming a feedback effect on profits and driving a marginal improvement in profit growth in the second quarter. There is a differentiated performance among sub-sectors, with urban and rural commercial banks performing better overall, leading in high-quality regional banks.

On-balance sheet business continues to be constrained by volume and price pressures, with optimization of debt costs benefiting interest rate spreads.

In the first half of 2024, the volume and price of on-balance sheet business of listed banks continue to be under pressure, with slowdown in scale expansion and decline in asset yield, suppressing the growth space of net interest income, which decreased by 3.43% year-on-year. Net interest margin continues to be affected by the decline in asset yield, but the gradual release of the optimization effect of debt costs provides an opportunity for improvement in interest rate spreads. In the first half of 2024, the net interest margin of listed banks was 1.64%, a decrease of 14 basis points from the end of the previous year. Asset yield on interest-bearing assets has a greater impact on interest rate spreads, and the effects of reducing deposit benchmark interest rates have been realized. In the first half of 2024, the asset yield on interest-bearing assets and the cost-to-income ratio of interest-bearing liabilities were 3.78% and 2.21% respectively, representing a decrease of 19 and 6 basis points from the end of the previous year.

Looking ahead to the second half of the year, there is a significant difference between the stock mortgage and the incremental mortgage spread, estimated to be 68BP, which indicates a downward pressure on interest spread. If we assume that the interest rate of existing housing loans under neutral conditions is reduced by 50BP, the calculated impact on bank interest spread would be -3.55BP. Balance sheet expansion continues to slow down. As of June 2024, the loan balance of listed banks has increased by 5.88% compared to the end of the previous year. The pattern of "strong corporate and weak retail" continues, with the growth rate of corporate loans slowing down; the deposit balance has increased by 3.22% compared to the end of the previous year, and the growth rate of state-owned banks' deposits has been greatly affected by the suspension of "manual interest supplementation".

As the middle-income level continues to decrease, investment income contributes to other non-interest income.

In the first half of 2024, non-interest income of listed banks increased by 2.03% year-on-year. The decrease in fee rates has resulted in poor performance of agency businesses, with a year-on-year decline of 12.03% in intermediate business; other non-interest income increased by 20.31%. Among them, investment income continues to benefit from the decline in interest rates, with a year-on-year increase of 27.75%, which is the core driver of non-interest growth.

Overall asset quality is stable, with retail non-performing loan risks needing attention.

As of June 2024, the non-performing loan ratio of listed banks is 1.17%, which is the same as the first quarter and the end of the previous year; the provision coverage ratio is 304.7%, a decrease of 4.77 percentage points compared to the end of the previous year. Various indicators are at a relatively favorable level in recent years, and overall asset quality is robust, with sufficient risk coverage. At the same time, according to incomplete disclosures in the interim report, as of the end of June, the non-performing loan ratio of 31 banks in the retail sector is 1.35%, an increase of 16BP compared to the end of the previous year, indicating further risk increase, which needs to be continuously monitored and followed up.