CSC: The reserve requirement ratio and interest rate cuts have landed as scheduled, continuing to favor the dividend yield strategy represented by state-owned large banks

According to the Zhitong Finance APP, CSC has released a research report stating that the release of a package of financial policies is beneficial for improving economic expectations. The actual macroeconomic indicators are still in the process of gradual recovery, and the banking sector is in a context of "strong policy expectations, weak fundamental reality." It is anticipated that the current round of financial policies will drive further economic recovery, thereby promoting substantial improvement in the fundamentals of banks. With the actual operations and expected bottom of the banking industry further solidified, the demand for allocation, which is centered on bottom-line thinking, high confidence, and high win rates, has further increased the safety margin. We remain optimistic about the dividend yield strategy represented by state-owned large banks.

In terms of allocation in the banking sector, overseas banks continue to be a key recommendation for Hong Kong-listed international banks. In the domestic bank sector, under the main line of high dividend yield, we recommend: 1) state-owned large banks. 2) Targets with no refinancing dilution risk, high dividend yield, and solid fundamentals. 3) Varieties with limited refinancing dilution risk that can quickly replenish through profit release and have certain counter-cyclical attributes. 4) Continue to pay attention to high-quality cyclical individual stocks whose valuations are severely constrained by dividend yields, but have significant valuation repair space once the dividend rate increases.

Event:

The People's Bank of China has decided to lower the reserve requirement ratio for financial institutions by 0.5 percentage points (excluding financial institutions that have already implemented a 5% reserve requirement ratio) starting from May 15, 2025. From May 8, the interest rate for 7-day reverse repurchase operations in the open market has been adjusted from 1.50% to 1.40%. Starting from May 7, the re-lending rate has been lowered by 0.25 percentage points. From May 8, the personal housing provident fund loan interest rate has been lowered by 0.25 percentage points. The re-lending quota for supporting agriculture and small enterprises has been increased by 300 billion yuan, and the re-lending quota for technological innovation and technological transformation has also been increased by 300 billion yuan, with 500 billion yuan set aside for structural policy tools for service consumption and elderly care loans.

CSC's main viewpoints are as follows:

1. The RRR and interest rate cuts are implemented as scheduled, and the economic stabilization policies continue to be intensified.

In March 2025, the central bank repeatedly stated that it would lower the RRR and interest rates at an appropriate time, which was fulfilled in May. The central bank lowered the policy interest rate by 10 basis points, which is expected to drive the Loan Prime Rate (LPR) down by about 0.1 percentage points. At the same time, the central bank lowered the provident fund loan interest rate by 25 basis points, aiming to consolidate the real estate market's stabilization trend in the domestic demand base. Additionally, multiple re-lending quotas have been increased, and structural policy tools for service consumption and elderly care loans have been established, aiming to further promote the incremental domestic demand for durable goods consumption such as automobiles and home appliances. The coordinated efforts on both quantity and price indicate a positive attitude from the policy side to stabilize the economy, which is conducive to alleviating market pessimism, improving economic expectations, and forming a unified force to gradually drive the economic recovery trend in a positive direction.

2. Simultaneously guiding the reduction of banks' liability costs, indicating a stronger intention to protect banks' net interest margins.

While lowering the policy interest rate, the central bank has also reduced the RRR and re-lending rates, and has clearly stated that it will "guide commercial banks to correspondingly lower deposit rates through the interest rate self-discipline mechanism." It is expected that the next step will see a symmetrical decline in deposit listing rates, reducing banks' funding costs, supporting interest margins, and maintaining the stability and sustainability of the banking industry's operations. Currently, the net interest margin of the banking industry is at a historically low level, and profitability continues to weaken. To ensure the sustainability of banks' endogenous growth and their resilience to future risks, it is expected that simultaneous reductions in both deposit and loan rates will become the norm, effectively alleviating the downward pressure on banks' net interest margins To ensure the stability of the banking industry's profitability and dividend levels.

According to estimates, this 0.5 percentage point reserve requirement cut and 10 basis point interest rate reduction will lower the net interest margin of listed banks for 2025E by 1.5 basis points, revenue by 1.1%, and net profit by 1.7%. However, considering the reduction in liability costs, the impact of this reserve requirement cut and interest rate reduction on the net interest margin is expected to be neutral.

3. The significance of the current reserve requirement cut and interest rate reduction signals is clear: stabilize real estate, promote consumption, and stabilize investment, to face external shocks with a more solid internal environment.

From the economic data of Q1 2025, the current economic environment is still in a slow and gradual recovery process, demonstrating the good effects of fiscal expansion in stimulating domestic demand and the preemptive effect of export grabbing. Under the current China-U.S. tariff game, our country has timely introduced a package of financial policies to stabilize market expectations, continuously solidifying the domestic circulation to cope with external shocks. After the release of the package of financial policies, market pessimistic expectations will be alleviated, economic recovery expectations will improve, and bank valuations are expected to recover under the impetus of policies.

Risk Warning: (1) The pace of economic recovery may be slower than expected, weakening corporate debt repayment capabilities, and some enterprises with poor creditworthiness may face default risks, leading to significant exposure risks for banks and a sharp decline in asset quality. (2) Concentrated exposure of risks in key areas such as real estate and local financing platform debts poses a significant impact on bank asset quality, greatly weakening banks' profitability. (3) The strength of the broad credit policy may be less than expected, and the rapid development of the regional economy where companies operate may not be sustainable, thus adversely affecting the company's credit issuance. (4) The effects of retail transformation may fall short of expectations, and large-scale fluctuations in the equity market may impact the company's wealth management business