The narrowing of the net interest margin largely reflects the impact of "loan repricing + the downward trend in new loan interest rates + the termization of deposits" in the first quarter. The increase in volume is not enough to offset the decrease in price, and the growth of net interest income is under pressure. The bond market trend has driven an increase in non-interest income contributions. Under the guidance of the policy layer that downplays increments and emphasizes quality and efficiency, the growth rate of credit scale may slow down trendily. In terms of credit allocation, it is expected that the strong corporate and weak retail trend will continue.

On May 31, the National Financial Regulatory Administration released the main regulatory indicators of commercial banks for the first quarter of 2024. Commercial banks achieved a net profit of 672.3 billion yuan in the first quarter of 2024, a year-on-year increase of 0.7%, with an average ROE of 9.57% and an average ROA of 0.74%, and a non-performing loan ratio of 1.59%.

According to the main regulatory indicators announced by the National Financial Regulatory Administration for the first quarter of 2024, as of the end of the first quarter, the total assets of Chinese banking financial institutions in foreign currencies were 429.6 trillion yuan, a year-on-year increase of 8.1% (9.7% in 2023); commercial banks achieved a net profit of 672.3 billion yuan, a year-on-year increase of 0.7% (3.2% in 2023), and the net interest margin of commercial banks was 1.54% (1.69% in 2023). In terms of asset quality, the non-performing loan ratio of commercial banks in the first quarter was 1.59%, unchanged from the previous quarter, and the provision coverage ratio was 204.54%.

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The decline in net interest margin increases revenue pressure

In the first quarter of 2024, the growth rate of commercial banks' net profit fell by 2.5 percentage points compared to the whole year of 2023, increasing by 0.7% year-on-year. The slowdown in credit growth and the decline in interest margin levels are important reasons for the slowdown in profit growth. Whether the revenue pressure will ease in the subsequent quarters still depends on the recovery of loan demand and the changes in asset pricing levels.

Looking at different types of institutions, in the first quarter, the net profits of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks changed by -4.6%, 1.1%, 4.1%, and 15.5% year-on-year, respectively, and the trend of differentiation continued, with the net profit of state-owned large banks decreasing year-on-year.

In the first quarter of 2024, the net interest margin of commercial banks decreased by 15BP from the end of 2023 to 1.54%. The concentrated release of repricing pressure in the first quarter led to a slight increase in the decline of the interest margin. Looking at different types of institutions, the net interest margins of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks were 1.47%, 1.62%, 1.45%, and 1.72%, respectively.

Looking forward to the subsequent quarters, the acceleration of the release of cost-side dividends will to some extent boost the interest margin level, and the decline in the interest margin is expected to slow down. In terms of scale, as of the end of the first quarter of 2024, the total asset scale of commercial banks increased by 9.1% year-on-year (11% in 2023), and the growth rate level slightly decreased under the background of focusing on the quality rather than the quantity of credit. Among them, the asset scales of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks increased by 11.2%, 4.1%, 9.7%, and 7.2% year-on-year, respectively, and the industry concentration continued to rise. It can be seen that although the interest margin continues to decline, the "leading goose" effect of state-owned large banks continues.

In the first quarter of 2024, the non-performing loan ratio of commercial banks remained unchanged from the previous quarter at 1.59%. Looking at forward-looking indicators, the attention loan ratio in the first quarter decreased by 2BP from the beginning of the year to 2.18%, and the asset quality remained stable. Looking forward, it is expected that the current risk exposure is relatively sufficient, the regulatory attention to risks in key areas is also continuously increasing, and counter-cyclical policy adjustments are also conducive to alleviating the pressure on the risk side of banks, and the asset quality is expected to remain stable.

In terms of provisions, as of the end of the first quarter of 2024, the provision coverage ratio of commercial banks decreased by 0.6 percentage points from the beginning of the year to 204.5%, and the absolute level remained stable. Looking at different types of institutions, the non-performing loan ratios of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks changed by -1BP, -1BP, 3BP, and 0BP from the beginning of the year to 1.25%, 1.25%, 1.78%, and 3.34%, respectively.From the perspective of investing in bank stocks, investors can focus on the configuration value of the banking sector as a high dividend target. The continuous interest rate cuts and the increasingly severe "asset scarcity" have a more significant negative impact on bank operations. The further release of repricing pressure in the first quarter may lead to a further narrowing of the industry's net interest margin. However, at the stock allocation level, the continuous decline in the risk-free rate also makes the fixed income-like configuration value of banks based on high dividends more prominent.

The average dividend yield of the banking sector over the past 12 months relative to the risk-free rate measured by the 10-year government bond yield is at a historical high, and it continues to widen, with the dividend attractiveness continuously increasing. Currently, the static PB of the banking sector is only 0.57 times, corresponding to an implied non-performing loan rate of over 15%, with ample safety margin. Looking at the whole year, the repair of residents' consumption tendencies and risk preferences is still worth looking forward to, becoming a catalyst for the recovery of the sector's profits and valuations.

In the first quarter of 2024, the year-on-year growth rate of the banking industry's net profit slowed down as a whole. In the first quarter, the overall net profit growth rate of the banking industry was 0.7%, down 2.58 percentage points from the whole year of 2023. Looking at different types, there is still a differentiation in the profit growth rates of different types of banks, with city commercial banks and rural commercial banks having higher net profit growth rates. The year-on-year changes in net profit for state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks in the first quarter were -4.57%, 1.17%, 4.08%, and 15.59%, respectively.

Looking at the performance attribution, under the pressure of narrowing interest margins, the year-on-year growth rate of the overall net interest income of commercial banks in the first quarter of 2024 was -2.59%, down 0.62 percentage points from the whole year of 2023. Non-interest income has a certain positive contribution to bank performance, and we judge that the reason is the strong performance of the bond market in the first quarter, leading to high growth in investment income for some banks.

Under the policy orientation of high-quality development, the growth rate of the banking industry's asset scale has slightly declined. In the first quarter of 2024, the growth rate of the total assets of commercial banks was 9.1%, down 1.81 percentage points from the end of 2023, of which the credit growth rate was 9.88%, down 0.95 percentage points from the end of 2023. The central bank emphasized in the monetary policy report for the first quarter of 2024 to "correctly understand the changes in the relationship between credit and economic growth," proposing a shift from scale thinking to a focus on structure. It is expected that the subsequent asset allocation of the banking industry will focus more on the improvement of quality rather than the increase in quantity, and the asset structure is expected to continue to improve.

As of the end of the first quarter of 2024, the net interest margin of commercial banks was 1.54%, down 15BP quarter-on-quarter. Among them, the net interest margins of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks were 1.47%, 1.62%, 1.45%, and 1.72%, respectively. The main drag on the narrowing of the net interest margin still comes from the asset side. First, the partial loan repricing brought about by the LPR rate cut in 2023 is mainly reflected in the first quarter. Second, the LPR rate cut in February 2024 has led to a decline in the yield of newly allocated loans.

It is expected that the subsequent pressure on the narrowing of the interest margin in the banking industry is expected to ease. From the asset side, on the one hand, the impact of the previous LPR rate cut has been gradually reflected. On the other hand, banks actively adjust the asset structure and increase the proportion of loans, and structural optimization is expected to make a positive contribution to the interest margin. From the liability side, regulators and banks themselves control the cost of deposits through methods such as prohibiting manual interest supplementation, reducing deposit rates, and adjusting the structure of deposits to protect the net interest margin of banks.

As of the end of the first quarter of 2024, the overall non-performing loan ratio of commercial banks was 1.59%, unchanged from the end of the previous quarter. Looking at different types, the asset quality of state-owned large banks and joint-stock banks is better, with a non-performing loan ratio of 1.25%, each down 1BP from the end of 2023; the non-performing loan ratios of city commercial banks and rural commercial banks were 1.78% and 3.34%, respectively, up 3BP and down 1BP from the end of 2023, respectively.

The overall provision coverage ratio of the industry remains stable. As of the end of the first quarter of 2024, the overall provision coverage ratio of commercial banks slightly decreased by 0.6 percentage points to 204.5%. Looking at different types of banks, state-owned large banks and joint-stock banks have relatively sufficient risk compensation capabilities. In the first quarter of 2024, the provision coverage ratio of state-owned large banks increased by 2.74 percentage points quarter-on-quarter to 251.2%, while the provision coverage ratios of joint-stock banks, city commercial banks, and rural commercial banks decreased by 1.04 percentage points, 3.7 percentage points, and 1.65 percentage points to 218%, 191.2%, and 132.7%, respectively.

The new capital regulations have a positive impact on the overall capital adequacy ratio of the banking industry. The new capital regulations officially came into effect at the beginning of 2024. As of the end of the first quarter of 2024, the core tier 1 capital adequacy ratio and the overall capital adequacy ratio of commercial banks increased by 23BP and 37BP, respectively, compared to the end of 2023, reaching 10.77% and 15.43%. The capital adequacy ratio level of the banking industry is at a high point since 2022.By bank type, the capital adequacy ratio (CAR) of state-owned large banks increased the most significantly, rising by 75 basis points (BP) quarter-on-quarter to 18.3%. The CAR of joint-stock banks, city commercial banks, and rural commercial banks increased by 10 BP, decreased by 17 BP, and increased by 48 BP to 13.53%, 12.46%, and 12.70%, respectively.

Volume growth fails to offset price decline

In the first quarter, commercial banks achieved a positive year-on-year growth in net profits, with the growth rate decreasing compared to 2023. In the first quarter, commercial banks realized a net profit of 672.3 billion yuan, a year-on-year increase of 0.7%, with the growth rate decreasing by 2.6 percentage points compared to the whole year of 2023. There are mainly two reasons for this:

First, volume growth fails to offset price decline, and the growth of net interest income is under pressure. In the first quarter, the expansion speed of commercial banks' balance sheets slowed down. At the end of the quarter, the total assets were 367.9 trillion yuan, a year-on-year increase of 9.14%, which slowed down by 1.81 percentage points compared to 2023; the net interest margin (NIM) in the first quarter narrowed by 15 BP compared to 2023 to 1.54%. Second, the bond market trend drives an increase in non-interest income contribution. Driven by the bond bull market in the first quarter, the financial market investment-related non-interest income of listed banks, especially some small and medium-sized banks, showed a dazzling growth. This provided certain support for revenue and profit growth rates. The proportion of non-interest income of commercial banks in the first quarter was 25.6%, reaching the highest level since 2020.

The profit growth rate of state-owned large banks and city commercial banks marginally slowed down, while that of joint-stock banks and rural commercial banks marginally improved. Looking at the performance of various types of banks, the net profits of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks year-on-year changed by -4.6%, 1.2%, 4.1%, and 15.6%, respectively; the growth rates changed by -6.3 percentage points, 4.8 percentage points, -10.7 percentage points, and 0.8 percentage points compared to 2023, respectively. The marginal improvement in profit growth rates of joint-stock banks and rural commercial banks is related to the increase in other non-interest contributions and the smaller impact of the interest rate reduction on existing mortgage loans in the first quarter.

The overall expansion speed of banks' balance sheets slowed down, still showing weak retail and strong corporate characteristics. Under the policy orientation of reducing increments, revitalizing stocks, and smoothing credit distribution, the expansion speed of commercial banks' balance sheets slowed down in the first quarter. As of the end of the first quarter, the total assets of commercial banks increased by 9.14% year-on-year, which was 1.81 percentage points lower than 2023 and 2.54 percentage points lower than the same period last year; among them, loans increased by 10% year-on-year, and non-credit assets increased by 7.6% year-on-year, which were 1 percentage point and 3.1 percentage points lower than 2023, respectively.

Looking at the loan structure, since the beginning of the year, the proportion of retail loan balances has decreased month by month, and the retail loan distribution is weak. It is mainly judged that the income expectations of the resident sector are unstable, the expectations for the real estate market are weak, and the trend of deleveraging continues. In addition, it is also related to the phased increase in the risk of consumer and business loans since the second half of 2023, and some banks have actively adjusted their risk preferences and contracted related businesses.

Although the overall expansion of banks' balance sheets has slowed down, the credit expansion of various types of banks continues to diverge. As of the end of the first quarter, the loans of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks increased by 11.9%, 5.1%, 10.4%, and 9.6% year-on-year, respectively; the growth rates were 1.4 percentage points, 0.7 percentage points, 0.4 percentage points, and 0.5 percentage points lower than 2023, respectively. Looking at the absolute growth rate level, state-owned large banks still play a leading role in maintaining a relatively fast expansion of the balance sheet, city commercial banks and rural commercial banks maintain a growth rate level of about 10%; the credit growth rate of joint-stock banks further declines.

Looking forward, under the guidance of the policy layer's emphasis on quality and efficiency over increments, the growth rate of credit scale may trend to slow down. In terms of investment direction, it is expected that the strong corporate and weak retail situation will continue. From the corporate side, it is expected that the main support will come from the acceleration of government bond issuance, which will increase the demand for related supporting loans; in addition, under the optimization of real estate supply and demand policies, it is expected that the credit distribution in the real estate field will be marginally improved.

From the retail side, the recent optimization of personal housing loan policies will help stimulate short-term transaction volumes and boost the marginal recovery of residents' housing loan demand. However, considering the current weak economic expectations, unstable resident income expectations, and the "buy high, not low" sentiment in resident housing purchases, it is expected that the resident mortgage loans will still not exceed the average loan growth rate in the future period, and it is necessary to continue to track the marginal changes in real estate transaction volumes and housing price indices.In terms of net interest margin (NIM), the margin narrowed to a historical low of 1.54% in the first quarter, with subsequent attention to the improvement of liability costs. The narrowing of the net interest margin was in line with expectations, with a reduced decline in the first quarter. The net interest margin of commercial banks in the first quarter was 1.54%, narrowing by 15 basis points (BP) compared to 2023. Among them, the net interest margins of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks were 1.47%, 1.62%, 1.45%, and 1.72%, respectively, each decreasing by 15BP, 14BP, 12BP, and 18BP compared to 2023.

The narrowing of the net interest margin largely reflects the impact of "loan repricing + the downward trend in new loan interest rates + the termization of deposits" in the first quarter. Looking at the quarter-on-quarter changes, the overall decline has somewhat narrowed; the joint-stock banks saw a slight increase (estimated commercial banks' net interest margin decreased by 5BP quarter-on-quarter from the fourth quarter of 2023, with state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks changing by -3BP, 1BP, -3BP, and -21BP, respectively).

Looking ahead, there is still downward pressure on the yield of banks' asset side, and the net interest margin remains under pressure; however, the cost rigidity on the liability side may gradually decrease, driven by the prohibition of manual interest supplementation and the reduction of deposit挂牌 interest rates. It is expected that the decline in the interest margin in 2024 will be less than that in 2023.

As of the end of the first quarter, the non-performing loan ratio of commercial banks was 1.59%, remaining unchanged quarter-on-quarter. The proportion of loans under special mention was 2.18%, decreasing by 2BP quarter-on-quarter, with commercial banks' asset quality indicators remaining stable. On one hand, commercial banks continue to write off a significant amount of non-performing loans, and on the other hand, the generation of non-performing loans remains stable (some provisions of the Financial 16 Measures have been extended until the end of 2024).

Looking at the financial reports disclosed by state-owned large banks, from 2020 to 2023, they have been vigorously writing off and disposing of non-performing loans, amounting to 0.65 trillion yuan, 0.69 trillion yuan, 0.63 trillion yuan, and 0.55 trillion yuan, respectively; the estimated non-performing loan generation rates after adding back write-offs were 1.26%, 0.93%, 0.87%, and 0.71%, respectively, with the pressure of non-performing loan generation within a reasonable range.

In the first quarter, the loan loss provision coverage ratio of commercial banks was 204.5%, and the loan-to-provision ratio was 3.3%, slightly decreasing quarter-on-quarter. In recent years, the loan loss provision coverage ratio has significantly increased, with the loan provision/total loans and loan provision/total assets indicators remaining stable. Considering that local debt restructuring is actively progressing and real estate credit risks are being steadily cleared in a manner of exchanging time for space, it is expected that some small and medium financial institutions will bear the pressure of non-performing loans, but the overall loan loss provision coverage ability of the banking system remains sufficient.

At the end of the first quarter, the core tier 1 capital adequacy ratio and the capital adequacy ratio of commercial banks were 10.77% and 15.43%, respectively, showing a slight increase quarter-on-quarter, mainly benefiting from the official implementation of the new capital regulations. As of the end of the first quarter, the risk-weighted assets (RWA) of commercial banks increased by 6.2% year-on-year, with the growth rate decreasing by 4.4 percentage points compared to the end of 2023, which is significantly greater than the growth rate of total assets.

Looking at various types of banks, the capital adequacy ratios of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks were 18.31%, 13.53%, 12.46%, and 12.70%, respectively, with quarter-on-quarter changes of 75BP, 10BP, -17BP, and 48BP, respectively, with state-owned large banks showing the largest increase in capital adequacy ratio.

From the perspective of the industry's fundamentals, considering that the interest rate reduction cycle has not ended and the interest margin is still under pressure, there is a trend of slowing credit scale growth, and the strength of loan loss provision support is weakening, it is expected that the growth rate of bank performance will not improve in the short term. However, positive factors are also increasing, including the expected acceleration of the improvement process of deposit costs and the marginal improvement of asset quality expectations. With the current interest rate center moving downward, the configuration value of stable state-owned large banks is看好. In addition, under the trend of scale downward and expansion differentiation, it is also recommended to pay attention to the growth premium opportunities of individual stock benchmarks.