Since the end of August this year, the share prices of banking stocks have experienced a notable decline, primarily driven by expectations of discounts on existing mortgage rates. The third quarter of the year saw the net interest margin of commercial banks drop to 1.53%, marking a historic low. This decrease can largely be attributed to a decline in loan income. However, with the implementation of the second round of discounts on existing mortgage rates, the hardships faced by commercial banks are expected to subside temporarily. In the coming months, regulatory support for banking institutions is anticipated to increase significantly.

One significant development to note is the effective termination of the "tough times" for banks. On November 29, the self-regulatory pricing mechanism for market interest rates introduced the “safety net clause initiative.” This initiative stipulates that during the validity period of an agreement, if there are adjustments in relevant laws and regulations concerning interest rates or changes in the People’s Bank of China’s benchmark deposit rates, banks are required to promptly inform customers of the adjustments made to the deposit rates prior to the execution of the deposit agreements.

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When customers enter into a deposit agreement with a bank, it involves essential requirements regarding the interest rates. For instance, if the agreed deposit interest rate is set at 2% for a three-year term, even if the deposit interest rate drops to nearly 1% during this period, the bank is still obligated to pay customers at the higher 2% rate. This arrangement has allowed some banks to engage in illicit practices, such as manually supplementing interest payments, effectively transferring the risk to the banks themselves.

Now that the self-regulatory pricing mechanism has explicitly prohibited such illegal actions, it has significantly relieved the financial burden on commercial banks. Importantly, individual savings depositors need not worry about their accounts being adversely affected, as the initiative mainly targets corporate clients. For example, if you have a three-year deposit agreement with a 2.5% interest rate, your personal deposit will remain unaffected over the full term of three years.

In addition to introducing the “interest rate adjustment safety net clause” for corporate deposits, the initiative also encompasses interbank deposit regulations, mandating that non-bank interbank demand deposit rates be subject to self-regulation. It outlines that, aside from financial infrastructure institutions, other non-bank interbank demand deposits should reasonably reference the publicly available seven-day reverse repurchase rates. Currently, interbank deposit interest rates hover between 1.7% and 2%, with the seven-day reverse repurchase rate at around 1.5%. This indicates there is considerable room for a downward adjustment in interbank deposit rates.

Interbank deposits refer to the lending of funds between banks, and by lowering interest rates, banks can reduce their interest expenses and minimize fund wastage, thereby achieving dual goals. Although there have been no recent adjustments in personal deposit rates, the regulatory changes have already alleviated banks’ burdens in alternative ways, favorably impacting the valuation recovery of bank stocks.

Examining the current landscape reveals that banking stocks still hold substantial potential for growth. Presently, the prices of many bank stocks are trading below their net asset value. As of November 22, all 42 listed banks in the A-share market had price-to-book ratios below 1. What does this mean? It essentially implies that if a bank were to go into liquidation today, the payouts to shareholders would exceed their initial investment.

Furthermore, considering the attractive dividend yield of bank stocks, which generally stands at around 5%, this is evidently higher than the interest rates for one-year time deposits. Consequently, banking stocks are currently perceived as undervalued. Since the end of 2022, we have witnessed a steady increase in bank stock prices, primarily attributed to the prevailing economic climate that fosters cautious investment attitudes among residents. Additionally, the continuous decline in deposit rates has highlighted the value proposition of high-dividend yielding bank stocks.

Looking ahead, the banking sector is poised to enter a "honeymoon period" regarding policy support in the next few months. On November 15, the China Securities Regulatory Commission released the "Regulatory Guidelines for Listed Companies No. 10 - Market Value Management," aimed at encouraging listed firms to enhance their investment value and genuinely improve investor returns.

Economic analysts indicate that regulatory bodies plan to impose clearer quantitative requirements regarding specific indicators, such as the price-to-book ratio of relevant central state-owned enterprise listed companies. Given that bank stocks are broadly trading below their net asset values, they are expected to stand out during this round of market value management.

Subsequently, the government is set to issue special treasury bonds to support state-owned commercial banks in replenishing their core Tier 1 capital. This sequence of events suggests a plethora of favorable themes for bank stocks in the months to come.

It is evident that, following extensive adjustments in the banking sector, coupled with a robust fundamental backdrop and an influx of favorable policies, the "hard times" faced by banks are likely nearing an end.