Shenwan Hongyuan Group: In 2026, the banking sector's alpha is better than beta. It is recommended to focus on two main themes: excellent city commercial banks and bottom-tier joint-stock banks.

Shenwan Hongyuan Group released a research report stating that the bank sector's alpha is better than beta in 2026, and the alpha of bank stocks this year comes from where, suggesting that the focus should be on the following two main lines: 1) Excellent city commercial banks that achieve asset expansion under marginal improvement in fundamentals. The logic chain of this main line is: "Asset-side project resources are sufficientprudent expansion of balance sheet, achieving better asset/credit growth speed than comparable peers, and even relative leadingbetter value by volume, or stable value with volume increasecombined with significant cost improvement on the liability sidestrong growth in net interest income." 2) Bottom stock banks that are expected to reverse the dilemma under the strengthening of real estate policies. Compared to the first main line, this main line may have expectations difference, and it needs to be closely tracked. Key points of Shenwan Hongyuan Group: Looking back, why does the bank repeatedly emphasize that it is more optimistic about individual stock "breakaway" this year? 1) Objectively speaking, in the investment in bank stocks in the past two years, the significance of stock selection is actually very limited, because in the first half of 2024-2025, A-share banks showed a "index-like market." Driven by heavyweight stocks such as state-owned banks, the sector's valuation central rose, but individual stocks' premium narrowed. 2) For the judgment of 2026, insurance asset allocation is still a very important sector driver, "stable performance + high dividend" is still the core demand of insurance for bank allocation at the current stage. The bank sector has reappeared with value characteristics, with the sector's dividend yield returning to 4.8%, which is still not negligible. 3) A more important change to be aware of is, if PPI trends improve and traditional economic repair represented by real estate occurs, market risk preference will also increase. Investors will tend to look for resilience and growth, and bottom-up stock selection will become more important. Looking at the bank sector, A-share banks have performed relatively weak since the beginning of the year, which is expected but also involves expectations difference. The weakness of bank stocks since the second half of last year is more due to the dual disruptions of fund and trade-side profit realization, but the expectations for the bank's annual performance in 2025 and the fundamental outlook for 2026 are marginally positive. At the current position, the bank continues to be optimistic about the absolute return of the bank sector, correcting investors' expectations difference: 1) "Interest rate cuts, moderately loose monetary policy profit continuing to decline." In fact, the bank judges that this year the bank's revenue may perform better than expected. Interest rate pressure still exists this year, but regulatory protection is active, as stabilizing bank interest rates is a prerequisite for "expanding the counter-cyclical adjustment space of monetary policy (the bank judges that this is also one of the reasons why the central bank is more cautious in cutting interest rates this year). Even with the introduction of interest rate cuts, it is necessary to lower deposit rates to hedge against (LPR dropping by 10bps, and it is necessary to lower fixed deposit rates by 15-20bps). For banks, a stable interest rate environment is the window for policy to give banks stable interest spreads (it is expected that the same-year interest spreads of listed banks in 2026 will narrow by a mid-single-digit percentage year-on-year), and the recovery of net interest income will drive this year's bank revenue pressure to be lower than last year. 2) "Risk disposal bank system self-bearance. In fact, the bank judges that risk mitigation can support banks to trade time for space, ensuring a smooth transition of asset quality. The risk pressure banks face at the current stage is essentially brought about by the pains of economic structural transformation, but the areas involved (real estate chain, platforms, etc.) are often "pulling the whole body with one hair," meaning that this round of bad debt cycle will not simply land with a "banks self-burden, full write-off" approach; the focus of risk resolution also shifts from adjusting the supply side to stabilizing the demand side. For banks, the bottom line of systemic risk is clear, and the decision by all parties to bear the impact on bank credit costs and profits may be better than market expectations; for banks with stronger risk control ability, earlier proactive adjustment of real estate, business loans, etc., maintaining a "low non-performing loan generation + high provision coverage ratio" bank will have the ability to achieve profit recovery and stable ROE. 3) Index funds periodically concentrate outflows lack of bank allocation value." In fact, the bank has noted that several banks have significantly narrowed/enlarged premiums/discounts compared to the sector, showing better allocation value at the moment. From January 10th to early February, the net outflow of index funds represented by Shanghai and Shenzhen 300 and the Shanghai stock exchange 50 totaled nearly 700 billion RMB; calculated based on the weight of banks in the index, this corresponds to a net outflow of about 80 billion RMB to bank stocks (for comparison, the total market value of active fund holdings in the fourth quarter of 2025 is about 3 trillion RMB, and assuming that the active funds hold a 1.99% bank stock, the market value of bank stocks held by active funds is about 60 billion RMB). Since February, the outflow of index funds has come to an end, and it no longer constitutes a financial pressure on the bank sector; and with the deep undervaluation of bank sector valuation and the significant contraction of premiums of several high-quality banks compared to the sector, now is the perfect time to invest in high-quality banks. Investment analysis opinions Optimistic about banks, the significance of stock selection in 2026 is significant, and high-quality banks are expected to be the first to return to 1 times PB. From the beginning of the year, the bank sector has led the decline, with valuations falling to about 0.6 times PB, and the current A-share bank dividend yield is about 4.8%, with most bank stocks' dividend yields exceeding 5%. Therefore, in terms of stock selection, it is recommended to focus on two main lines: 1) Excellent city commercial banks that achieve asset expansion under marginal improvement in fundamentals: Bank Of Chongqing (regional beta, continuous profit recovery on the income statement + clear capital replenishment requirements from convertible bonds), Bank Of Suzhou (solid reserves, double improvement in revenue and profit + clear logic of asset expansion), Bank Of Ningbo (management changes implemented + down pressure on reserves peaks + bottomed profit improvement). 2) Bottom stock banks that are expected to reverse the dilemma under the strengthening of real estate policies: Industrial Bank (deep suppression in real estate, fundamentals bottom out, clear convertible bond requirements + constituent heavyweight stock), CITIC BANK (profitable stock banks that have earlier digested the burdens of real estate, etc.), China Merchants Bank (benchmark stock banks in fundamentals, with a higher dividend yield than large banks). Risk warnings: Interest spread stabilization is below expectations; weak real demand, economic recovery pace is slower than expected; Some real estate risks disturb, retail risks exposed exceed expectations.