CMSC: Banking industry Annual Report 2024 is resilient. It is recommended to adhere to long-termism and balanced allocation.

The CMSC released a research report stating that as of March 28, 42 listed banks had a total of 23 banks disclosed their annual reports, including 6 state-owned banks, 8 joint-stock banks, 3 city commercial banks, and 6 rural commercial banks. In addition, 12 banks that did not disclose their annual reports disclosed their quick reports. In terms of bank targets selection, considering the differences in style in the short, medium, and long term, it is recommended to adhere to a long-term perspective and balanced allocation. In the three sub-sectors of state-owned banks, joint-stock banks, and regional banks, it is recommended to select the top 20% of banks with superior valuation from the perspective of free cash flow. This will also achieve a balanced allocation of dividends, recovery, and growth. The main points of the CMSC are as follows: - In 2024, the performance of listed banks continued to show marginal improvement trends. - The revenue, PPOP, and net profit attributable to the parent of the 23 listed banks increased by -0.6%, -1.6%, and 1.8% respectively year-on-year, with changes of +1.0%, +1.2%, and +1.0% from 24Q1~3; The single-quarter revenue, PPOP, and net profit attributable to the parent in 24Q4 increased by +0.8%, 0.04%, and +3.2% year-on-year, with changes of +3.7%, +4.4%, and +2.2% from 24Q3. In terms of individual stocks, high-quality regional banks showed relatively good absolute performance growth. From a performance driver perspective: - In 2024, the credit contraction of listed banks led to a slowdown in scale expansion, and the pressure on interest margins and intermediary income from reduced interest rates and reduced fees resulted, but profit growth maintained resilience. On one hand, the contribution of non-interest high growth from bond market floating gains during the period of interest rate decline; on the other hand, banks with excellent asset quality benefitted from the counter-cyclical provisioning. Outlook for 2025: - It is expected that the pressure on interest margins of banks will ease, intermediary income is expected to turn positive, but after the end of the unilateral downward trend in bond market interest rates, it will be difficult to sustain the high growth of non-interest income from normal bond market floating gains, while the exposure of retail bad debts has not yet ended, causing a convergence in the intensity of provisioning. Therefore, after considering both positive and negative contributions, it is expected that the overall performance growth of listed banks in 2025 will continue to maintain resilience, with the central performance growth rate expected to be equivalent to that of 2024. Investment strategy: - In the first three quarters of 2023 and 2024, amid a period of declining nominal economic and profit growth, the banking sector benefited from performance resilience and high dividend characteristics, significantly outperforming the market. Within the banking sector, the high dividend factor also had a significant advantage. After 924 in 2024, as the economy and capital market sentiment warmed up, the recovery and growth factors gradually became dominant, leading to a convergence of relative advantages of banks, and the internal advantages within the sector also gradually diverged. Future outlook: - In the short term, after a period of increase, the market entered a period of volatility, with increased uncertainty in the external environment. The relative valuation and defensive advantage of dividend levels in the banking sector increased. It is expected that high dividend banks will once again outperform in terms of relative returns. In the medium term, the uncertainty in the external environment will to some extent increase the continuity and strength of domestic policies, which will benefit the central performance growth of nominal GDP, meaning that recovery-type banks will have a certain policy hedging period. In the long term, the ROE, performance growth, and dividend payout ratio of listed banks are higher than the overall market, while the valuation is lower than the overall market. Low valuation before the fact implies high returns after the fact. Moreover, as future mutual fund assessment systems pay more attention to long-term performance and actual profitability, it is expected that the banking sector with high sharp and high long-term annualized returns will benefit from institutional style re-allocation, favoring the convergence of banking sector discounts and valuation repair. Therefore, at the current stage, the bank sector is optimistic about the absolute and relative returns of the banking sector in the short, medium, and long term. Risk warning: Financial concessions, narrowing of interest margins, economic recovery falling short of expectations, deterioration in asset quality, etc.