China Galaxy Securities: Bank Sector Allocation Window Opening, Maintaining Industry Recommended Rating

China Galaxy Securities released a research report stating that since 2025Q3, the level of favorability towards the banking sector has remained relatively low, and recent passive outflows of funds have caused disruptions to the banking liquidity. It is expected that the redemption outflow space will converge, and the low valuation window for banking sector allocation will open. In an environment of low interest rates and accelerated entry of medium to long-term funds into the market, the dividend attributes of high dividend yield and low valuation of the banking sector continue to have sustained appeal for long-term funds such as insurance funds, accelerating the restructuring of valuation pricing. At the same time, Northbound funds have been active since the beginning of the year and are expected to increase their allocation to the banking sector, with a greater possibility of increased allocation to certain preferred shareholding banks. The company continues to view the dividend value of the banking sector favorably and maintains a buy rating. Primary viewpoints of China Galaxy Securities are as follows: Market style shift, active funds continue to be underallocated, and preference remains at a low point In 2025Q4, the total market value of banking holdings by active funds was 30.545 billion yuan, accounting for 1.88%, an increase of +0.07pct compared to the previous quarter, still at a five-year low; the underweight ratio was 8.88%, an increase of 0.5pct compared to the previous quarter. The main flow of funds have been towards non-banking financial industries, with holdings increasing by +2.07pct, +1.89pct, and +1.03pct respectively compared to the previous quarter. Since 2025Q3, there has been a noticeable shift in market style with sector rotation. From the beginning of the year until January 28, 2026, the SSE 300 Index has risen by 1.9%, with non-ferrous metals, petroleum and petrochemicals, and media industries leading the way with increases of 28.89%, 12.49%, and 12.22% respectively, while the banking sector has fallen by 7.68%, performing weaker than other industries. Overall, the banking sector has maintained a relatively low level of favorability among active funds. Recent disturbances in the banking sector have been caused by passive outflows of funds, with a convergence of redemption outflow space expected in the future As of January 28, 2026, the net outflow of stock ETFs due to subscriptions and redemptions amounted to 757.99 billion yuan, with the estimated net outflow of funds from the banking sector due to subscriptions and redemptions at around 83.14 billion yuan based on the current weightings of the various indices. Looking at the impact of the changes in the scale of the SSE 300 ETF on the banking sector, the net outflow of subscriptions and redemptions from the SSE 300 ETF since January amounts to approximately 543.8 billion yuan, with an estimated net outflow of funds from the banking sector at 65.4 billion yuan. The four largest SSE 300 ETFs have a concentrated holding structure, with the top ten holders holding an average of 90%, mainly comprising insurance funds and leading securities firms. Currently, the market share of the four largest SSE 300 ETFs is lower than the holding share of the top ten holders in the first half of 2025, with an average decrease of about 43%. Although selling pressure still exists, the convergence of redemption outflow space is expected to weaken the impact on the banking sector. The influence of long-term funds on the pricing of banks is further highlighted, and the impact of Northbound funds is also worth noting As fund disturbances accelerate clearance, the influence of long-term funds on the pricing of the banking sector is increasing, while the influence of active and passive public funds is diminishing. Looking at the medium to long term, long-term funds such as insurance funds are expected to stabilize the valuation center of the banking sector and drive further improvement, bringing opportunities for oversold rebounds and opening up allocation windows. For long-term funds represented by insurance funds, in a context of low interest rates and continued shortage of assets, stable dividend payouts, high dividend yields, and the ability to include Other Comprehensive Income to cope with performance fluctuations, as well as the ability to account for equity method to share in the profit growth of high ROE regional banks, further enhancing investment returns. The average dividend yield of A-share banks is currently 4.62%, making the dividend value still attractive; with a good start to the year, credit growth is expected to remain stable, optimization of liability costs is expected to support the narrowing of interest rate spreads, enhancing the outlook for fundamental improvement; fiscal policies are positive, monetary policies are expected to continue to stabilize interest rate differentials, which also support performance and favor valuation repair. In addition, foreign capital remains optimistic about the A-share market, with active trading of Northbound funds in the early part of the year. Referring to historical data, the holding proportion of Northbound funds in the bank sector in the first quarter increases compared to the fourth quarter of the previous year, with an average increase of 1.07pct in every year except 2023. Among them, certain commercial banks with a higher preference from Northbound funds are more likely to benefit from increased foreign investment. Risk warning: Economic performance falls below expectations, risks of deteriorating asset quality; downward pressure on interest rates, risks of NIM compression; impact of tariffs, risks of weakened demand.