As we look back at the first three quarters of 2024, it becomes increasingly evident that financial investments by publicly listed banks have gained substantial tractionWith the contribution of these investments to overall revenue reaching 27.8%, we observe a 2.3 percentage point increase compared to 2023. This significant rise in financial investment performance is particularly pronounced among urban commercial banks and rural commercial banks, both surpassing the 35% mark in their contributionsInterestingly, the highest growth in contribution came from joint-stock banks and rural commercial banks, which improved their performance by 3.26 percentage points and 4.36 percentage points, respectively, compared to the previous yearThis clearly underscores the growing importance of financial investment as a key driver of banking performance.

When it comes to asset allocation decisions, it is worth noting that most banks prioritize issuing loans before allocating excess capital to investments

In such scenarios, the remaining liquidity—calculated by assessing the difference between deposits and loans—serves as a useful metric for determining the extent of investment allocation that banks can undertake.

The latter half of 2024 saw fluctuations in the growth rates of the ‘deposit-loan’ differential; initially declining and then recovering, which parallels the trend observed in the growth rates of financial investmentsBy the end of the third quarter, the 42 publicly listed banks experienced a financial investment growth rate of 11.36%, reflecting a quarter-over-quarter increase of 1.07 percentage points.

One noteworthy trend throughout 2024 is the gradual rise in the proportion of financial investments held by listed banksBy the third quarter’s conclusion, the aggregate scale of financial investments reached an impressive 87.7 trillion yuan, accounting for 29.4% of the banks' total major asset categories

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Excluding the state-owned banks, other types of banks showed proportions exceeding 30%. The increase in financial investments over the first three quarters amounted to 6.79 trillion yuan, representing 38.6% of the total asset incrementNotably, state-owned banks and urban commercial banks maintained the highest proportions, at 41.7% and 35.5%, respectively.

Despite the observable impact of residual liquidity on the total debt allocation of banks, there exists a clear divergence in investment behaviors across different institutionsState-owned banks have dramatically increased their debt investments, demonstrating an impressive growth rate that outpaces their competitorsIn contrast, the growth rate for joint-stock banks and urban commercial banks generally mirrored the fluctuation of the ‘deposit-loan’ differential: they experienced an initial decline, stabilized, and then began to recover

Meanwhile, rural commercial banks saw a notable decrease in their investment activities.

Focusing on state-owned banks, there is a robust demand for balance sheet expansion; however, these banks are grappling with substantial deposit outflowsTo address their asset requirements, they could resort to funding through interbank liabilitiesUnder the influence of regulatory changes demanding manual interest compensation adjustments, the deposit-loan differential for state-owned banks experienced a notable decline in the first half of 2024. Nevertheless, this did not significantly dampen their appetite for investment, as they continued to enhance their collection of interbank deposits and the scale of issuing interbank certificates of deposit, thereby maintaining a steady expansion in their asset profile.

For joint-stock banks and urban commercial banks, financial investments serve as a tool for managing residual liquidity, with their growth rates closely matching the trajectory of deposit-loan differentials

These institutions faced immense pressure regarding deposit growth in 2024 as financial investment growth rates plummeted significantlyHowever, after the effects of the ‘cancellation of interest compensation’ policy began to ease in the third quarter, a stabilization and recovery in financial growth rates were observed.

Conversely, rural commercial banks are experiencing a notable decline in their financial investment growth rates, which can be attributed to an exceptionally high base year in 2023 when they registered the highest growth rate among all bank types at 13.6%. Although the early part of 2024 saw robust activity in long-term transactions for these banks, the intensity of investment contributions remained relatively weakMoreover, with the bond bull market in the first half of 2024, rural commercial banks strategically disposed of a significant portion of their financial assets that were accounted for using amortized cost.

A marked trend is the expansion of the proportion of financial assets accounted for at fair value through other comprehensive income (FVOCI), which has risen at the expense of assets measured at amortized cost (AC). The third-quarter data for 2024 indicates that publicly listed banks generally improved their FVOCI holdings, with a proportion now standing at 26.4%, a 3.1 percentage point increase from the end of 2023. Specifically, state-owned banks, joint-stock banks, urban commercial banks, and rural commercial banks recorded increases in their FVOCI proportions by 3.63 percentage points, 1.13 percentage points, 3.06 percentage points, and 3.82 percentage points, respectively.

Examining the specifics, state-owned banks are seen prioritizing investment in short-term bonds and interbank certificates of deposit within their FVOCI accounts, driven by the need to bolster their asset scale amidst funding from non-bank deposits

Urban commercial banks and rural commercial banks also increased their trading positions in the first quarter, but by the second quarter, they began realizing profits, leading to a decrease in trading proportionsBy the third quarter of 2024, the FVOCI share for rural commercial banks had already climbed to 42.5%.

On the varieties of financial securities chosen, publicly listed banks continue to favor holding bonds to maturity, with a significant proportion of financial bonds represented in FVOCIDuring the first half of 2024, government bonds comprised 58% of the financial investments made by publicly listed banksAmong different bank types, state-owned banks held the highest proportion of government and policy financial bonds at 79.4%. In contrast, the investment structures of joint-stock banks and urban commercial banks are more diversified, with corporate bonds and fund investments representing a greater share than other banks

Remarkably, rural commercial banks displayed a hefty 27% proportion of financial bonds, largely due to substantial investments in interbank certificates of deposit.

Looking deeper into the account categories, the AC account reveals a predominance of interest rate bonds, making up 84.6% of the total, whereas in the FVOCI accounts, the main focus remains on interest rate bonds, with financial bonds and corporate bonds contributing to 22% and 23%, respectivelyFinancial assets measured at fair value through profit or loss (FVTPL) predominantly consist of fund investments.

In the first half of 2024, publicly listed banks increased their holdings of financial bonds, chiefly interbank certificates of deposit, while reducing exposure to non-standard financial productsEvaluating by bank type, state-owned banks significantly increased their holdings of government and financial bonds

Joint-stock banks, facing acute pressure from deposit outflows, reduced holdings of government bonds and non-standard investments while ramping up corporate bond and fund investmentsUrban commercial banks primarily increased their holdings of government bonds and funds while cutting back on non-standard exposures, whereas rural commercial banks increased the allocation to financial bonds and fund investments.

When examining investment yields, since 2022, a consistent narrowing of the spread between lending rates and bond yields has marked the landscape for publicly listed banks, enhancing the comparative effects of bond investmentsThe average yield for bond investments by these banks stood at 3.13% during the first half of 2024, a decline of 19 basis points from 2023. In an environment of falling interest rates, various asset yields across banks experienced differing degrees of decline, exacerbated by multiple rounds of cuts to the Loan Prime Rate (LPR) and reductions in existing mortgage rates, leading to a narrowing of the loan-investment yield differential to 120 basis points.

In terms of investment duration, state-owned banks have traditionally favored longer maturity periods for their bond investments, a trend that looks to be shifting as 2024 progresses

Notably, state-owned banks are starting to reduce their portfolio duration, possibly due to guidance from the central bank advocating for the purchase of shorter maturities and due to pressure from interest rate risk indicators on their balance sheets, prompting proactive adjustments.

Examining data from major players such as Industrial and Commercial Bank of China (ICBC) and Postal Savings Bank of China, we see that the bond investment duration for state-owned banks averages approximately five yearsIn the first half of 2024, both ICBC and Postal Savings Bank decreased their allocation of bonds with durations over five yearsThis shift could be attributed to the delayed issuance of government bonds in 2024, compelling state-owned banks to acquire shorter-term bonds to compensate for asset sizeFurther, financial reporting indicates that when interest rates rise during the first half of 2024, net interest income declines markedly, suggesting that state-owned banks may be shortening the duration of their bond portfolios to manage interest rate exposure effectively.

Within different account types, the AC accounts exhibit longer investment durations compared to FVOCI accounts

In the first half of 2024, investments with maturities of over five years constituted over 50% of the entries in the AC accounts of state-owned banks, with an average duration of approximately 5.24 years—this being the highest among all bank categoriesIn contrast, the FVOCI investments predominantly fall within the 1-5 year time frame, accounting for approximately 48% of the total.

A breakdown by bank type shows that joint-stock banks lengthened the average remaining duration of their FVOCI investments to about 4.55 years, with over 30% exceeding the five-year mark—making them the longest in this regard amongst all bank typesConversely, state-owned banks possess a greater proportion of short- and medium-term bonds in their FVOCI accounts, with bonds in the 3-month to 1-year category making up 17.5%.

Given the interplay of factors such as dwindling loan demand, delayed government bond supply schedules, and the rapid decline of bond market interest rates, trading behaviors in self-owned bond investments by banks have emerged as a leading focus in 2024, yet the extent of allocation remains weak

In the third quarter of 2024, the investment growth rate within AC accounts stood at 6.85%, reflecting a 4 percentage point reduction from 2023. However, in the fourth quarter of 2024, as government bond supply increases in conjunction with a slight uptick in bond market interest rates, banks are expected to bolster their allocation efforts, resulting in stronger provisioning.

A notable observation from the third-quarter data indicates that financial investment projects now play an increasingly crucial role in contributing to the revenue of publicly listed banksFinancial investment segments have consistently shown escalation in performance contributions to revenueAs aforementioned, by the end of the first three quarters of 2024, financial investment endeavors accounted for 27.8% of total revenue—a 2.3 percentage point surge from the previous year.

The year 2024 has seen a rapid decline in bond market interest rates, which fostered a favorable trading atmosphere for self-owned investments at banks

Over the first three quarters of 2024, publicly listed banks recorded that the portion of self-owned trading performance relative to overall revenue surged to 10.62%, marking a 2.43 percentage point increase from the prior yearIn this context, state-owned banks, joint-stock banks, urban commercial banks, and rural commercial banks reported improvements of 1.52 percentage points, 3.72 percentage points, 3.58 percentage points, and 5.96 percentage points, respectivelyParticularly noteworthy is the active participation of rural commercial banks in bond market transactions since 2024, with these banks registering the most significant increase in performance contributions.

When dissecting net investment income, it is clear that increases at joint-stock banks, urban commercial banks, and rural commercial banks can be largely attributed to the effective handling of AC and FVOCI assets.

From this perspective, it is crucial to highlight three key areas enhancing income: First, the income generated from the spread between bond buying and selling, along with fund dividends and fluctuations in bond and fund market values

This component, benefiting from the bond bull market, saw a prevalent increase in revenue contribution, ranging between 2 and 4 percentage points across various banks, with joint-stock banks reflecting the most substantial gainsSecond, the income derived from the disposal of FVOCI assets has seen an increase—since the start of 2024, publicly listed banks have generally enhanced their FVOCI accounts, contributing to a revenue rise of 1.2 percentage pointsFinally, the revenue from disposed AC holdings has surged, as some banks have accelerated the turnover of financial assets within their AC accounts (disposing of older securities). In the first half of 2024, rural commercial banks recorded a staggering 2.8% of their revenue coming from the disposal of AC assets.

As we conclude our analysis of financial investments, it becomes clearly visible that listed banks, especially rural commercial banks, have seen substantial floating profits in their FVOCI compositions in 2024. Buoyed by the favorable turn in bond market conditions, the floating gains from FVOCI accounts grew rapidly