Shenwan Hongyuan Group: In 2026, insurance-driven growth remains a key factor in the valuation restoration of the banking sector. Stock selection focuses on two main themes: asset expansion and improved real estate.

Shenwan Hongyuan Group released a research report stating that it is optimistic about banks, and the selection of stocks for 2026 is of great significance. High-quality banks are expected to be the first to repair to a PB ratio of 1. On the one hand, "insurance funds allocating to banks" is still ongoing, and the drive of insurance funds in 2026 is still the key to the valuation repair of the sector. On the other hand, the stock selection focuses on two main themes: 1) the main theme of asset expansion. High-quality city commercial banks that achieve asset expansion under the marginal improvement of fundamentals. 2) Real estate improvement theme: under the strengthening of real estate policies, stock banks that benefit first from the easing of new pressures. Shenwan Hongyuan Group's main points are as follows: Since the second half of 2025, bank stocks have underperformed, and funding is the core issue. Currently, there are four main reasons to support the bank valuation repair: 1) the outflow has ended: the outflow of index funds has come to an end. From January 10 to early February, the Shanghai and Shenzhen 300 and the Shanghai 50 saw a net outflow of nearly 700 billion, corresponding to a net outflow of about 80 billion for bank stocks, which currently no longer constitutes funding pressure. 2) Holdings are at a low: active fund holdings in banks are at historical lows. In the fourth quarter of 2025, the proportion of public funds holding banks was less than 2%, and many high-quality banks have significantly reduced their premium over the sector valuation. 3) High dividends: the sector dividend yield is 4.7%, returning to the point of increase in insurance fund holdings in the fourth quarter of 2024, showing that long-term fund allocation is ongoing. 4) Stable performance: Banks' revenue performance in 2026 is expected to be better than in 2025. This stems from both the active support of interest rate differentials by the central bank and the effective risk mitigation measures supporting stable bank performance. Based on this, the group clearly proposes the strategy of "banks stronger than in 2026", with a focus on individual stock selection under moderate inflation expectations. Objectively speaking, in the past two years, in the "index-like market" of bank stocks, the significance of selecting stocks with better performance is limited, but as sector valuations rise and premiums for high-quality individual stocks shrink, the value of individual stock selection becomes prominent. An important change worth noting is that in the opening year of the "Thirteenth Five-Year Plan", the economic goals of various regions are clear, and the rise in the PPI may be the main drive for "anticipated repair". Looking back, under the narrative of gradual inflation repair, the bank market may be the first to pick up. It is worth noting that the consumer price index turned positive after 36 months in February. If there is a trend of improvement in price indices and a traditional economic recovery led by real estate, investors are more inclined to seek the difference between expectations of elasticity, fundamentals, and valuation repair, making the significance of bottom-up stock selection even more important. Looking at the fundamentals of banks, the group believes that the pressure on banks' stable revenue performance in 2026 will be better than last year, and investors still have different expectations for this. 1) "Interest rate cuts do not mean continued decline in profits": Regulatory protection of interest differentials, and stable interest differentials are the premise for "broadening the space for counter-cyclical monetary policy adjustments." Even if interest rate cuts are announced, it is necessary to adjust deposit rates accordingly. For banks, a stable interest rate environment is the window for policies to stabilize interest differentials (it is estimated that the year-on-year decline in bank interest differentials will narrow to the mid-single digits this year, and interest differentials are expected to stabilize on a month-on-month basis, with no lack of banks achieving a year-on-year stability in interest differentials for the whole year). 2) "Risk disposal does not mean self-burdening of the bank system": In fact, the group believes that risk mitigation supports banks in exchanging time for space, ensuring a smooth transition of asset quality, with multiple parties sharing the burden, which may lead to a smaller impact on banks' credit costs and profits compared to market expectations. For banks that are originally better at risk control, have proactively reduced exposure to real estate and business loans earlier, and maintain a "low non-performing loan generation + high provision coverage ratio," they are more capable of achieving profit recovery and stable ROE. Risk warning: Interest rate stabilization is less than expected; weak real demand, economic recovery slower than expected; disturbance in risks of some real estate enterprises, unexpected exposure of tail-end customer risks.