In light of the prolonged low-interest environment, analysts remain optimistic about the banking sector, leveraging its resilient dividend logic as a stable investment avenueThe anticipation is that the banking sector will increasingly absorb additional funds, which in turn accelerates the process of valuation reshapingAs the economic landscape improves and strengthened data supports these changes, the narrative surrounding banks may shift from a focus on "high dividends" to an emphasis on "fundamental recovery." This transition is expected to occur within the next several quarters, bringing more focus to the stability and growth potential of this sector.

Looking at measurable outcomes, the financial reports for the first three quarters of 2024 reveal that 42 listed banks generated a combined operational revenue of CNY 4.28 trillion, marking a year-on-year decline of 1.05%. Interestingly, urban commercial banks led the sector with a growth rate that surpassed their competitors

The third quarter showcased a positive shift, with listed banks achieving a revenue growth of 0.89% year-on-year, a significant turnaround from negative growth, attributed in large part to a booming non-interest income driven by a bullish bond marketWhen examining the core segments, state-owned banks, joint-stock banks, urban commercial banks, and rural commercial banks revealed varying revenue growth rates of -1.19%, -2.49%, 3.93%, and 2.15% respectively.

The expansion of listed banks' revenue from negative to positive growth is notable, especially since the only strong contributor to this revenue was the non-interest incomeOn the revenue structure front, the continuous decline in net interest income—prompted by lowered mortgage rates, reduced Loan Prime Rate (LPR), and insufficient effective credit demand—witnessed a 3.19% year-on-year drop

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Nonetheless, a decrease in deposit rates, along with regulatory constraints on high-interest deposit-seeking behaviors, alleviated some of the pressure on liability costs, mitigating the severity of net interest income declines in the third quarter.

Specifically, listed banks saw a reduction of 10.75% in net fee and commission income during the first three quarters, although there was a diminishing of the decline compared to previous quartersThis recovery dynamic largely emanates from new policies introduced in September, which improved capital market activity and thus rekindled investor appetite—helping to marginally thaw the wealth management services within banksMoreover, as interest rates continued to fall and bond markets thrived, other non-interest income soared to a remarkable 25.61% year-over-year growth, making it the sole positive growth driver for overall revenues.

Profitability also saw a slight uptick, as these 42 listed banks reported a return-on-equity figure of CNY 1.66 trillion for net profits attributable to parents, reflecting a year-on-year increase of 1.43%. This pace was more pronounced in joint-stock banks and urban commercial banks, where profits grew by 0.85% and 6.67%, respectively

Notably, in a quarterly context, net profits increased by 3.53% compared to the previous year, indicating a robust rebound aided by a replenishment of reserves.

A breakdown reveals that 35 banks enjoyed positive profit growth while seven experienced declines, suggesting a growing divergence within the sectorMost notably, Shanghai Pudong Development Bank led with a striking profit growth of 25.86%—the highest in the industry—followed closely by Hangzhou Bank and Changshu Bank, both of which posted growth rates exceeding 18%. This performance can be attributed to their robust geographical positions, strong loan demands, and high asset quality.

However, an ongoing concern is reflected in social financing dataThese figures denote that weaknesses in both quantity and structure still underscore formidable domestic demand shortfalls

Over the first eleven months of 2024, the cumulative increase in social financing amounted to CNY 29.4 trillion, down significantly by CNY 4.24 trillion compared to the previous yearAs of late November, the total stock of social financing was at CNY 405.6 trillion, correlating to a meager growth rate of 7.8%—a historical lowWithin this structure, the first eleven months showed a considerable curtailment in RMB loans, causing stress in social financing increments which predominantly rely on governmental bonds.

On the lending front, a dip in RMB loans was recorded in nine out of the eleven monthsConsumer demand seems to be in dire need of stimulation, with short-term loans lagging, while long-term loans have begun showing signs of recovery due to slashed housing loan rates and other stimulating policies around real estateCorporate lending, however, reflects a similar pattern with both short-term and long-term loans dwindling compared to previous years

The continued decline in social financing also fundamentally reflects inadequate demand exacerbated by the optimization of financial accounting methods, which has led to a “watered-down” effect.

From the banking perspective, slower loan growth has resulted in a stark focus on corporate lending while retail lending remains dormantThe total asset growth for listed banks slumped below 10% this year, signifying the profound impact of both high base effects and poor demandInstances of lending activity decreased by 6.43% over the first three quarters, attributable to a stringent crackdown on funding maneuvers that artificially inflated loan statistics, reinforcing tighter regulations from financial authorities.

Urban commercial banks showcased resilience, maintaining double-digit loan growth rates benefitting from regional economic strengths

Conversely, joint-stock banks struggled with retail lending recoveriesIn the first half of the year, for instance, company loans and personal loans accounted for 76.71% and 16.85% of incrementally new loans—both declining as compared to last yearThis imbalance underscores a broader trend of strong corporate demand versus weak retail conditions.

In light of the more proactive macroeconomic adjustments which include a more accommodative monetary policy, there are expectations for a gentle recovery in lendingCentral economic meetings have heralded further fiscal policies, committing to boost the deficit ratio and intensify fiscal spendingThe initiation and utilization of long-term special bonds will open new avenues for infrastructure investments, industrial upgrades, and a flourishing household sector, thereby priming the pump for credit demands.

Moreover, the consistent signal towards moderately easing monetary policies, coupled with potential interest rate cuts, promises to unleash more liquidity into the market

Lower interest rates directly decrease borrowing costs for companies, enhancing their willingness to invest in growth and thus stimulating consumer spending as wellSuch favorable dynamics can, in turn, elevate credit levels across banking institutions.

In line with these projections, the central economic meeting has articulated plans to rejuvenate domestic demand, signaling a return in importance to consumer spending as a driver of economic growthThe government’s emphasis on consumption policy is anticipated to intensify in 2025, likely presenting further opportunities for sectors impacted negatively by retail sluggishness.

As deposit costs continue to progressively improve, expectations are that overall performance from the liability side will show positive trendsGiven the downturn in economic growth alongside significant withdrawal in investment demands, the asymmetry in falling rates on both assets and liabilities has impacted net interest margins—a crucial aspect of banks’ profitability

The weighted average interest rate on loans has dropped from 5.74% at the end of 2019 to 4.15% by September 2024, reflecting a significant downward trend driven largely by repeated adjustments in mortgage rates.

In summary, as banks work through these adjustments in their asset and liability structures, the resulting implications are twofold: while credit risks may gradually diminish due to improved local government capacities—and consequently amplified financing returns—a cautious optimism remains for gradually elevating bank asset quality metricsThe balance between addressing concerns regarding local government debts and fostering a stable lending environment will be paramount moving into 2025.

With the prospects of an impending recovery highlighted by policy adjustments, banks are set to continue as pivotal entities within the financial sector, adhering to prudent principles while navigating the dual pressures of challenging local economic landscapes and regulatory frameworks