The first quarterly report has landed one after another.
Banks' net profits showed negative growth. This is relatively rare.
China's listed banks as a whole have seen a brief quarterly contraction in profits during the pandemic.
The first quarter report of the big four banks was negative:
ICBC's operating income was 210.165 billion yuan, down 3.8 percent year-on-year, and net profit was 87.653 billion yuan, down 2.78 percent year-on-year.
CCB's operating income was 200.928 billion yuan, down 2.97% year-on-year, and net profit attributable to the parent company was 86.817 billion yuan, down 2.17% year-on-year.
The operating income of ABC was 186.021 billion yuan, down 1.76% year-on-year, and the net profit attributable to the parent company was 70.386 billion yuan, down 1.63% year-on-year.
Bank of China's operating income was 160.818 billion yuan, down 3.01% year-on-year, and net profit attributable to the parent company was 55.989 billion yuan, down 2.9% year-on-year.
However, banks as a whole have risen quite a bit, and the big four banks have risen the most.
The question is, why are they going up?
Can it continue to rise?
It's hard to say about short-term fluctuations, but banks probably have a lot of room to rise.
Moreover, the decline in bank profits is a big positive for the stock market as a whole.
Next, let's explain it in detail.
1. Why are banks rising?
There are three main reasons why banks can rise.
1. Valuation fixes
The PB of the bank is already around 0.52 times.
And it has been declining for many years, and the lowest has been dried up to 0.45 times.
But... Is this reasonable?
It is true that the growth rate of banks is not as fast as before, but the ROE of an industry of about 10%, 0.5 times the PB is too exaggerated.
The ROE of the CSI 300 is also about 10%, and the median PB is 1.47 times.
Considering the bank's debt problems, a discount should be given.
Then a half-discount to the bank's PB should also be 0.7-0.75 times.
Therefore, there is still room for the bank to repair.
2. The impact of real estate is declining
The reason why banks' valuations are so low is not a matter of profit growth, but a concern about real estate debt.
People are afraid that the bank will step on the thunder, so they give the bank a very low valuation.
In the face of a credit crisis, fundamentals are not worth mentioning.
However, the bad debts of the banks have not exploded, and the management is always on guard against financial risks. Then the drag of real estate on bank valuations will gradually wane.
3. Long-term allocation fund buying
In the short term, the market may be ineffective and will lose the ability to discover value.
But in the long run, good assets will not be buried.
For many long-term allocation funds, their bond yields will decrease year after year as interest rates continue to fall.
In order to maintain an annualized rate of return, they must allocate more equity assets.
Bonus assets such as banks can replace some bond allocations.
The reason is very simple, the dividend yield of banks is above 5%, and the interest rate on 10-year treasury bonds is only about 2.3%.
These are the three main reasons why banks are rising.
But now that bank profits are declining, will there be stable dividends in the future?
2. Money never grows old
Unlike other industries, banking is a special business.
Let's put it this way, if you were asked to buy a stock for 20 years and not sell it, what industry would you choose?
I think you're likely to choose between finance and the consumer industry.
Because change is fast in any other industry, you can't predict whether these companies will be alive in the next 10 years.
But banks are slow to change. Why is it slow?
Because the business model of banks is to make money through money.
In other words, as long as M2 continues to grow, the bank's long-term performance can be guaranteed.
As can be seen from the chart below, the total assets of banks have been higher than M2 for a long time.
Don't forget, banks are the business of making money out of money. Assets mean profit for them.
In addition, banks are systemically important, so it is impossible for the banking industry as a whole to put them in crisis. (I'm talking about the whole, not individual banks)
For a bank of the size of the Big Four, it is systemically important, so it is impossible for them to have an accident.
If something happens to them, everyone's wealth will be gone.
Knowing this, we can see that the decline in bank profits is only temporary, and that in the long run, their growth rate will outperform GDP.
3. Banks make profits in order to raise big fish
A significant reason for the decline in bank profits in the first quarter was the decline in net interest margins.
Many people might say that banks' net interest margins are bottomless.
But is it possible?
As mentioned above, banks are systemically important.
If the banks can't survive, will everyone's wealth still exist?
The main purpose of the bank concession is to raise the fish in the pond.
To put it bluntly, the bank's profits mainly come from two aspects:
1. Asset size;
2. Breath difference.
The purpose of making the spread low is to make the scale bigger.
In fact, banks can be thought of as governments, and governments survive mainly on taxes.
When the economy is in trouble, the government cuts taxes and even raises the deficit ratio to cover the entity.
When the economy recovers and the entity grows, the government will be able to generate more tax revenues.
The same is true for banks.
The temporary concession is to allow the economy to stabilize and rebound faster.
Let's just say that banks are very relevant to the economy.
As long as the economy can continue to grow, the performance of banks will continue to grow.
So, the underlying logic of investment banking is to see if you don't believe the economy will grow.
Fourth, the bank's quarterly report is good for A-shares
After understanding the relationship between banks and the economy, it is not difficult to understand why the performance of the first quarter report declines, and the bank will still rise in the future.
Investing is about the future rather than past performance.
When we look at financial reports, we mainly analyze the future through the past.
When a bank's performance declines, we can draw the following conclusions:
First, the central mother's interest rate cut is stronger than expected.
I've been sharing with you that Yang Ma has a lot of tools, and interest rate cuts are always quiet.
By tracking the interest rate on the 1-year certificate of deposit, we can know that the central mother's interest rate cut is very strong.
Don't look at the reverse repo rate, MLF and LPR rates, which are very narrow rates.
These rate reductions do not necessarily equate to rate cuts.
Second, the rate of recovery in profits of non-financial enterprises has increased
Judging from the situation of the first quarter, the profit growth rate of the A-share market, excluding the financial industry, has increased a lot.
Isn't that a good thing?
Third, the future performance is promising
Most of the banks in our country are government-run banks, that is, they all have to obey the command of the central mother.
They are a tool for activating the economy.
This tool is temporarily profitable, which means that the future performance of the enterprise can be expected.
In fact, in the first quarterly report, A-shares, excluding financial real estate, petroleum and petrochemical and power equipment, profits rebounded.
In other words, the bottom of A-share profits has appeared!
Fifth, the water is big and the fish is big
From a big-picture perspective, shrinking bank profits are not a bad thing.
For banks, temporary concessions are made in order to have more and bigger fish later;
For the state, the temporary concession is to get the economy back on track as soon as possible;
Isn't it a good thing for A-shares that corporate profits are picking up faster?
The fate of the bank and everyone is tied together.
You have me, I have you.
Of course, when things get back on track, bank valuations will continue to recover to a reasonable range.
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