In the second quarter, loans grew steadily, with corporate loans contributing significantly to the increase, and credit growth in key areas was notably high. In the next phase, under the dual influence of market demand and policy guidance, both monetary and fiscal policies are still anticipated, with policy space remaining, and loans in key areas are expected to grow rapidly.

Since 2024, bank credit has been in a state of "de-watering", with a total of 13.5 trillion yuan in new RMB loans added from January to July, about 2.5 trillion yuan less than the same period last year. Excluding "bills + non-bank", "pure loans" added 12.7 trillion yuan, about 3.7 trillion yuan less than the same period last year.

Trend-wise, since February 2024, the growth of pure loans has continued to show a monthly year-on-year decrease, especially after the "opening red" ended and entered the second quarter. From April to July, the growth momentum of bills noticeably increased, accounting for about 42%.

Ping An Securities analysis suggests that demand suppression affects credit allocation, with the pace of credit allocation slowing down marginally. Corporate loans contribute significantly to the increase, and the negative growth gap in mortgage loans widens.

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Looking at the industry as a whole, in the second quarter, financial institutions' RMB loans grew by 8.8% year-on-year, a decrease of 0.8 percentage points from the end of the first quarter. The insufficient effective credit demand still constrains the expansion of credit scale. In terms of structure, corporate business has become the main direction of credit business in the first half of the year. Taking industrial medium and long-term loans in RMB and foreign currencies as an example, they grew by 17.5% at the end of the half-year (23.6% at the end of the first quarter), far higher than the overall loan growth rate.

In addition, at the end of the half-year, infrastructure medium and long-term loans grew by 11.7% year-on-year (13.4% at the end of the first quarter), and fiscal efforts to support infrastructure loan growth rates remained stable. At the end of the half-year, the balance of real estate medium and long-term loans grew by 5.7% year-on-year (5% at the end of the first quarter). The coordination mechanism for real estate financing and the promotion of "white list" projects have supported the marginal recovery of real estate loan growth rates to a certain extent. The elasticity of real estate financing demand still needs to be followed up with subsequent sales data and the recovery of cash flow in real estate companies.

Inclusive finance loans maintain high growth, and the growth rate of loans in the agriculture, rural areas, and farmers (three rural areas) remains stable. At the end of the first half of 2024, inclusive micro loans grew by 16.9% year-on-year (20.3% at the end of the first quarter), and the growth rate of inclusive finance loans remains at a high level. In addition, at the end of the half-year, inclusive micro loans for farmers' production and operation grew by 14.6% year-on-year (17.1% at the end of the first quarter), RMB and foreign currency loans related to agriculture grew by 12.1%, and the balance of rural loans grew by 12.1% year-on-year. The growth rate of loan allocation in the three rural areas is still far higher than the industry average. Under the guidance of the "five major articles", the coverage of credit allocation fields continues to expand.

In contrast, the effective demand for retail credit is still insufficient, and the negative growth gap in mortgages widens. At the end of the first half of 2024, household loans grew by 3.8% year-on-year (5.1% at the end of the first quarter), and the growth rate of retail credit further declined. Looking at the breakdown, mortgage loans ended the half-year with a year-on-year negative growth of 2.1% (-1.9% at the end of the first quarter), with early repayments and the sluggish real estate sales dragging down overall loan growth.

Furthermore, at the end of the half-year, personal consumer loans excluding mortgages grew by 6.6% year-on-year (8.7% at the end of the first quarter), and RMB and foreign currency personal business loans grew by 12.1% year-on-year (15.4% at the end of the first quarter), both showing不同程度的下滑下滑, with the characteristic of insufficient residential credit demand becoming more apparent. Looking ahead, under the background of continuous policy support, the recovery of residential credit demand remains to be observed.

The differentiation of credit resources deepens.The credit contraction in the manufacturing sector is significant, while there are signs of stabilization in real estate loans. As of the end of June 2024, the growth rate of long-term loans in the manufacturing industry was 18.1%, a decrease of nearly 14 percentage points from the beginning of the year. This indicates that over the past few years, the manufacturing sector has become a focal point for the convergence of financial resources, but it has also led to certain supply and demand contradictions and may have resulted in a phenomenon of capital idling. Against the backdrop of credit "water squeezing," there has been a noticeable contraction in the allocation of manufacturing loans.

Since 2024, regulatory authorities have introduced a series of supportive tools and measures for the real estate market, including the establishment of a "white list" system to precisely support the financing of real estate projects and to promote the implementation of policies to ensure the delivery of buildings. Under these circumstances, there are signs of stabilization in the allocation of real estate loans. Data shows that in the first quarter, the new scale of real estate development loans was 880 billion yuan, an increase of 270 billion yuan year-on-year, and the balance growth rate at the end of March was 1.7%, a slight increase of about 0.2 percentage points from the beginning of the year.

At the same time, the regional differentiation of credit resources has further deepened. In recent years, the Yangtze River Delta and the Chengdu-Chongqing dual economic circle regions have become highlands for the concentration of credit resources. As of the end of June, the credit growth rate in Jiangsu Province was about 12%, significantly higher than the national average of 8.8%, and the credit growth rate in Sichuan Province was also above 12%.

In contrast, the credit growth rate of enterprises in the Northeast region is generally low, such as Heilongjiang and Jilin provinces, where the loan growth rate is only about 5%, not only lower than the national average but also still significantly lagging behind the Yangtze River Delta region.

In the first half of 2024, retail loans increased by a total of 1.47 trillion yuan, a decrease of more than 2 trillion yuan year-on-year. In terms of structure, consumer loans (including housing mortgages) increased by -182.2 billion yuan, a decrease of about 1.5 trillion yuan year-on-year, while business loans increased by 1.65 trillion yuan, creating a certain seesaw effect between the two.

As of the end of March 2024, the growth rate of housing mortgages had fallen to -1.9%, a further decline of 0.3 percentage points from the beginning of the year, and the gap with the growth rate of retail non-mortgage loans exceeded 12 percentage points. This indicates that the demand for housing mortgages is showing a further weakening trend, and the pressure of early repayment remains significant, increasing the pressure on retail loan allocation.

As the rectification of "manual interest subsidies" approaches its end, the loss of bank deposits has significantly decreased. Between April and July 2024, the incremental change in general deposits of state-owned large banks improved month by month, with the largest increase in April. By July, the seasonal decline in general deposits was 1.44 trillion yuan, a reduction of about 40 billion yuan year-on-year. This means that the loss of bank deposits has significantly decreased, and for non-bank institutions, the inflow of incremental funds will also decrease accordingly, making it easy to experience financial tension and stratification pressure.

In July, the growth rate of M1 was -6.6%, and the growth rate of M2 was 6.3%, with the gap between the two widening. The main reason may be the "agreement to fixed deposit" conversion, that is, some state-owned large banks and joint-stock banks absorbed unit agreement deposits by bypassing the self-discipline upper limit through product innovation in the second quarter, which saw a significant reduction in July. Data shows that in July, small and medium banks reduced unit agreements by more than 500 billion yuan, and the total new increase in fixed deposits, margin deposits, and structured deposits was nearly 750 billion yuan.

The decline in interest rate spreads has shown a trend of narrowing.

It is worth noting that against the backdrop of a significant differentiation in credit structure, the deviation between the loan rates of high-quality enterprises and the Loan Prime Rate (LPR) is increasing.Looking at the direction of LPR reform, there is a certain deviation between the LPR quotes and the loan interest rates for high-quality customers. In the future, it may be necessary to strengthen the assessment of quote quality and reduce the deviation. Referring to the effective federal funds rate that the Federal Reserve focuses on, as well as the Euro Short-Term Rate (ESTR) that the European Central Bank focuses on, China's LPR can also explore development in this direction in the future.

At present, the deviation between the loan interest rates for high-quality enterprises and the LPR quotes has increased, with the proportion of loans made at a discount to LPR reaching 40%, weakening the benchmark nature of LPR for newly issued loans.

In terms of loan interest rates, as of the end of June, the corporate loan interest rate was 3.63%, down by 10 basis points (BP) month-on-month from the end of March; the mortgage loan interest rate was 3.45%, down by 24 BP month-on-month from the end of March, with a greater contradiction in the supply and demand of loans on the retail side.

In terms of deposit interest rates, against the backdrop of the rectification of "manual interest supplementation," ultra-self-discipline deposits face the re-signing of contracts, and the disintermediation of funds forms low-cost interbank liabilities. Due to the strict regulation of ultra-self-discipline deposits, banks have strengthened the control of liability costs, and the interest rate reduction on deposits has a more significant improvement effect on costs than before. With the re-pricing of deposits upon maturity, newly absorbed deposits will be priced based on the latest listed prices and self-discipline limits.

From the perspective of net interest margin (NIM), in June 2024, the NIM of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks were 1.46% (down by 1 BP month-on-month), 1.63% (up by 1 BP month-on-month), 1.45% (unchanged month-on-month), and 1.72% (unchanged month-on-month), respectively. It can be judged that the decline in bank interest margins has shown a trend of narrowing.

As of August 29, 2024, the semi-annual reports of listed banks that have been disclosed show that the growth rate of non-interest income in the banking industry is 3.3%, among which the net income from fees and commissions has a negative growth of 14.5%, but the net investment income has increased by 26.3% year-on-year. This is mainly due to the weaker bank credit allocation, the increase in government bond supply, the increased allocation of bonds in the secondary market, and the significant decline in bond market yields.

At present, the bond market is showing a volatile trend, and the capital gain effect has weakened. In the first half of the year, with the net investment income exceeding expectations, the bond capital gain in the second half of the year may weaken. For small and medium-sized banks with a higher proportion of bond investments, the growth rate of net investment income may not be able to continue the high growth trend of the previous period.

Although the loan interest rate is still at or in a downward phase, the pressure on the subsequent banks' NIM may not be completely relieved, but the deposit interest rate reduction in July can offset the LPR adjustment, forming a protection for NIM. The reduction of "manual interest supplementation" has a significant improvement effect on liability costs. With the re-pricing of deposits, bank liability costs may further decrease, especially for state-owned large banks with a higher proportion of "manual interest supplementation" deposits, and the improvement effect is expected to be more significant.

The financial regulatory authority and the semi-annual reports of listed banks disclose that the basic data of various aspects of banks show that since the second quarter, bank profits have been robust, NIM has been stable, and asset quality has been stable, which has dispelled some of the market's concerns that bank operating performance may be lower than expected in the context of an "weak recovery" economy.

The dividend yield spread between A-share listed bank stocks and government bond yields is still at a historical high, and the overall low bond interest rates will strengthen the "high dividend" characteristics of bank stocks. Before the spread between the two returns to the mean, the bank sector, as a "fixed income-like" product with robust profits, high dividend yield, and low valuation volatility, may still have a significant allocation appeal to long-term funds such as insurance, against the backdrop of the "asset scarcity" pressure not being alleviated.State-owned major banks' financial market businesses are relatively stable, with bond investments primarily focused on short-duration bonds, and credit allocation can achieve "making up for price with volume." The overall performance of banks' fundamentals is stable.

Policy space is still anticipated.

On August 26, Pan Gongsheng, Secretary of the Party Committee and Governor of the People's Bank of China, chaired a symposium with representatives and committee members of the Two Sessions, experts and scholars, and heads of financial enterprises to analyze and study the current economic and financial situation. On August 30, the People's Bank of China released the statistical report on the direction of financial institution loans for the second quarter of 2024.

Since 2024, monetary policy adjustments have been implemented multiple times, strongly supporting the economic recovery and improvement. In 2024, the intensity of macro policies has been further strengthened, with a series of policies aimed at expanding domestic demand, stabilizing expectations, and preventing risks being introduced one after another. The economic operation continues to improve, and the fundamentals of China's economy are robust.

The central bank has carried out three significant monetary policy adjustments in February, May, and July, including the reduction of reserve requirements and LPR in February, the "517" new policy for the real estate industry, and the interest rate cut in July, among other monetary policy tools. These have been effective in consolidating and strengthening the economic recovery and improvement trend. Based on this, Ping An Securities analyzed and judged that in the next phase, under the dual influence of market demand and policy guidance, monetary and fiscal policies are still anticipated, with policy space remaining, and loans in key areas are expected to grow rapidly.

Loans grew steadily in the second quarter, with significant growth in key areas. By the end of the second quarter, the balance of RMB loans from financial institutions was 250.85 trillion yuan, a year-on-year increase of 8.8%.

Corporate loans grew steadily, with industrial, service, and infrastructure long-term loans maintaining a high growth rate. By the end of the second quarter, the balance of corporate loans was 168.05 trillion yuan, a year-on-year increase of 10.4%, with the main increase concentrated in long-term loans; the balance of long-term loans in industry was 23.73 trillion yuan, a year-on-year increase of 17.5%; the balance of long-term loans in the service industry was 67.05 trillion yuan, a year-on-year increase of 10.4%; the balance of long-term loans in infrastructure-related industries was 40.13 trillion yuan, a year-on-year increase of 11.7%. With policies increasing their efforts to serve the real economy, loans in related industries are expected to maintain a high growth rate.

Inclusive finance, green, and agricultural loans maintained rapid growth, with financial institutions continuing to support inclusive small and micro loans to achieve a transformation from quantity to quality, enhancing the continuous production and development capabilities of small and medium-sized enterprises. By the end of the second quarter, the balance of inclusive small and micro loans was 32.38 trillion yuan, a year-on-year increase of 16.9%, 8.1 percentage points higher than the growth rate of all loans; the balance of green loans was 34.76 trillion yuan, a year-on-year increase of 28.5%, 20.2 percentage points higher than the growth rate of all loans; of these, loans directed to projects with direct and indirect carbon emission reduction benefits were 11.53 trillion yuan and 11.69 trillion yuan, respectively, accounting for 66.8% of green loans combined.

Financial institutions continue to increase their support in credit allocation, utilization of carbon emission reduction support tools, and enriching the green product shelves, indicating significant development space for green financial products. Agricultural loans grew steadily, with the balance of agricultural loans reaching 50.67 trillion yuan by the end of the second quarter, a year-on-year increase of 12.1%, 3.8 percentage points higher than the growth rate of all loans. Banks use re-lending and rediscount tools to support weak links, explore credit opportunities for agricultural enterprises, directly benefiting the growth of on-balance-sheet credit scale and the optimization of credit structure.

Real estate loans increased year-on-year, and financial support for real estate financing has been effective. By the end of the second quarter, the balance of real estate development loans was 13.77 trillion yuan, a year-on-year increase of 2.8%; the balance of mortgage loans was 37.79 trillion yuan, a year-on-year decrease of 2.1%. The balance of real estate loans was 53.1 trillion yuan, with a growth rate 0.04 percentage points higher than the end of the previous year. Under the requirements of financial support for real estate in terms of credit support, coordination and collaboration, and the prompt implementation, the financing needs of the real estate industry are expected to be effectively met and achieve long-term healthy development.