Shenwan Hongyuan Group: It is recommended to continue to focus on high-quality regional banks and undervalued shares of listed banks.

Shenwan Hongyuan Group released a research report stating that bank stocks are low-volatility dividends in counter-cyclical periods, with absolute returns taking the lead in pro-cyclical periods + elastic varieties in later cycles. Positive economic expectations and favorable policies for long-term funds entering the market are frequent, with policy and fund factors having a catalytic effect, highlighting the continued advantage of high bank dividends; with a focus on stability in the fundamentals, if the economy steadily recovers, banks will also demonstrate elasticity in later cycles. At the individual stock level, after the implementation of capital injection plans for state-owned major banks, it is not ruled out that after a temporary decline in stock prices, dividend yields will once again highlight their value attributes, with Hong Kong stocks having a greater dividend advantage compared to A-shares; at the same time, smaller and mid-sized banks with high dividends that do not involve dilution of share capital will be more attractive in terms of dividend yields. Continue to focus on high-quality regional banks with solid provisions and growth opportunities assigned by regional under the policy tailwind, as well as undervalued listed joint-stock banks. The main points of Shenwan Hongyuan Group are as follows: It is expected that in the face of concentrated realization of non-interest income base pressure, the revenue of listed banks in the first quarter may experience a slight negative growth, but the performance will continue to demonstrate healthy growth According to the group's tracking and forecasts for key listed banks, it is expected that the revenue of listed banks in the first quarter of 2025 will decrease by 0.7% year-on-year (compared to flat year-on-year in 2024), and the net profit attributable to the parent will increase by 1.1% year-on-year (compared to 2.4% in 2024). Looking at different types of banks, the group's overall assessment is that state-owned major banks will anchor industry profit growth, joint-stock banks and urban-rural commercial banks will face revenue pressure, but high-quality banks will continue to lead in performance. Specifically, it is expected that urban and rural commercial banks will see revenue growth of 3.6% and 1% respectively (compared to 7.7% and 3.1% in 2024), with net profit attributable to the parent increasing by 7.9% and 4.3% respectively (compared to 9.5% and 5.5% in 2024). Urban-rural commercial banks in the Jiangsu-Zhejiang and Chengdu-Chongqing regions are expected to continue to achieve industry-leading performance with double-digit growth. State-owned banks are stable at the bottom, with revenue and net profit attributable to the parent expected to decrease by 0.5% and increase by 0.9% year-on-year, respectively. Overall, joint-stock banks may see a decline in revenue and profit, and differentiation will become more prominent, with revenue and net profit expected to decrease by 2.3% and 0.2% year-on-year, respectively. Focus on banks that may achieve revenue recovery and positive earnings earlier. Other non-interest income related to financial market investment is the largest pressure on bank revenue in the first quarter, mainly due to the high base of bond market profits during the same period and the impact of net losses driven by rising interest rates since the beginning of the year, with joint-stock banks and urban-rural commercial banks being particularly affected; banks may appropriately realize fair value gains on OCI assets to smooth revenue pressure 1) The main reason for the pressure on non-interest income base due to differences in market interest rate trends: in the first quarter of 2024, the yield on 10-year government bonds decreased by approximately 30 basis points (compared to a decrease of 12 basis points in the same period in 2023), and some banks saw an unexpected increase in deposits at the beginning of 2024 but weak demand for physical retail credit, resulting in a significant increase in allocations to bonds for gold market business revenue. The group estimates that in the first quarter of 2024, the investment-related non-interest income of listed banks increased by 18% year-on-year, with the base pressure for state-owned banks relatively limited (a year-on-year increase of only about 5% in the first quarter of 2024), while the growth rate of other non-interest income of joint-stock banks and urban-rural commercial banks was generally in the range of 30%-60%. By contrast, the cumulative increase in the yield on 10-year government bonds in the first quarter of 2025 was approximately 30 basis points, and other non-interest income may be the biggest drag on first quarter bank revenue. 2) A negative year-on-year growth in other non-interest income of listed banks in the first quarter is a high probability event, but the group believes that it will not experience a deep decline as some investors fear; the group estimates that the decline in other non-interest income of listed banks in the first quarter of 2025 will generally be in the 10-20% range: based on the analysis of the group's spring strategy report and annual report overview of bank financial investment structure and quarterly changes in non-interest income, it can be seen that on one hand, since the second quarter of last year, banks of all kinds have been actively adjusting their financial investment structure to cope with the impact of potential interest rate fluctuations, reducing the proportion of trading profit or loss categories and increasing the proportion of other comprehensive income categories, with the latter unrealized gains accumulating in other comprehensive income. In the fourth quarter of 2024, the market interest rate significantly decreased (with a single-quarter decrease of over 50 basis points), and the disclosed annual reports of several banks showed that other comprehensive income for the fourth quarter of 2024 increased by over 50% compared to the third quarter of 2024. On the other hand, banks have also actively chosen to moderately realize unrealized gains to smooth revenue performance. Against the background of faster market interest rate decline in the fourth quarter of 2024, the investment-related other non-interest income of several banks in the fourth quarter of 2024 decreased significantly compared to the third quarter of 2024. Considering the accelerated increase in market interest rates since February this year, if banks realize gains in time at the beginning of the year, the impact of interest rate changes may be relatively limited. On a more positive note, the drag on revenue from the narrowing of net interest margins has begun to converge, benefiting from the release of the red dividend from declining liability costs and the steady expansion of interest-earning assets driven by credit expansion exceeding expectations at the beginning of the year, the group believes that the net interest income of banks in the first quarter will continue to grow positively, providing a stable base for revenue recovery 1) Despite the fact that banks in the first quarter will still have to digest the effects of repricing and debt-to-equity conversions, the group believes that due to the downward trend in costs, the decline in net interest margins for listed banks will continue to converge: according to the group's calculations in the annual strategy report, repricing and debt conversions in the first quarter of 2025 will drag banks' net interest margins by approximately 12 basis points, coupled with the downward trend in asset pricing within 2024 (including interest rate cuts, adjustments in mortgage rates, etc.), net interest margins for listed banks in the first quarter of 2025 may decline by over 30 basis points year-on-year. However, the group also estimates that the decline in liability costs will contribute approximately 17.5 basis points to the net interest margin of banks in 2025, with this boosting effect mainly reflected in the peak deposit season in the first quarter. The group expects that the year-on-year decline in net interest margins for listed banks in the first quarter of 2025 will be in the range of 10 to 15 basis points, with banks that have more room for cost improvement and can selectively price assets on the asset side expected to keep the decline in net interest margins within 10 basis points or less (compared to a 17-basis-point narrowing of net interest margins for listed banks in 2024, with a maximum decline in the first quarter of 2024 of approximately 23 basis points and a convergence to 13 basis points in the fourth quarter of 2024). 2) Credit growth remains stable, with potential marginal improvement on the retail side, and banks with a more prominent advantage in corporate resources are currently more capable of achieving quantity compensation with price adjustments, with some urban commercial banks seeing credit growth far exceeding expectations: as of the end of February, the industry lending growth under the social financing calibre in the first quarter was7.1%, roughly the same as the end of last year, and according to the bank's prediction in the spring strategy report for this year's total credit increment (approximately 18 trillion), the annual bank credit growth rate will remain stable at around 7%. Structurally, under the background of a good start to the year and strong early performance, banks at the beginning of the year mainly focused on corporate lending (over 90% of new loans in January and February were directed towards corporations), with some city commercial banks showing much faster credit growth than expected (for example, Bank Of Chongqing's loan growth in the first quarter of 2025 increased by 17% year-on-year, accelerating by about 5 percentage points compared to 2024); at the same time, considering the easing of mortgage prepayments and banks increasing support for high-quality consumer loans, retail lending in March may also improve. Overall, stable and effective credit issuance is still a necessary condition for banks to stabilize their revenue earlier this year and perform better than their peers. At a time when the demand for physical credit is gradually recovering, the focus should be on banks in regions with policy support and more opportunities for credit issuance. If the effects of policies become apparent and the improvement in retail demand becomes more certain, banks will also increase their focus on retail businesses, and banks that focus on retail and small and micro clients will see better growth performance.Provisioning continues to be the main force maintaining stable growth in the banking industry in the first quarter. However, looking at the differentiation within banks, retail banks face relatively greater pressure on short-term asset quality compared to other banks. The speed of nonperforming loan generation and the thickness of existing provisions will determine the final profit performance for banks that continue to focus on "low NPL generation + high coverage ratio." We expect the nonperforming loan ratio of listed banks in 1Q25 to have decreased by 1bp since the beginning of the year to 1.23%, due to both proactive write-offs and the increase in the denominator resulting from concentrated lending at the beginning of the year. The provision coverage ratio is expected to remain stable at around 240% compared to the beginning of the year. From the annual reports already disclosed by banks, it can be seen that since 2024, the increase in nonperforming loans has mainly been concentrated in the retail sector (with improvement in nonperforming loans in the corporate sector, many banks maintaining nonperforming loan ratios below 1% in the corporate sector, and real estate nonperforming loan ratios generally falling from high levels). On this basis, it can also be seen that the nonperforming loan ratio for retail banks in 4Q24 has risen quarter on quarter; some banks increasing the intensity of write-offs have also led to a faster decline in their provision coverage ratios (such as rural commercial banks). In the short term, the asset quality pressure on retail banks will be relatively greater than on other banks, but considering the characteristic of rapid entry and exit for retail risks, as nonperforming loans peak and banks prudently control the channels for incremental lending and customer screening, disturbances to asset quality are expected to ease. Risks: Implementation of stable growth policies falling below expectations, economic recovery pace slower than expected; stabilization of interest rate spreads falling short of expectations; accelerated exposure of tail risks in nonperforming loans.