China Galaxy Securities: Moderately loose policy continues, bank valuations remain resilient.

China Galaxy Securities released a research report stating that the monetary policy meeting in the first quarter of 2026 set a tone of stability and prudence. While continuing the loose overall environment, it more accurately guides financial resources towards key areas. It provides a buffer for banks' interest rate spreads through optimizing the interest rate mechanism and the dividend of lowering debt costs. Moreover, the focus on the capital strength of banks jointly constitutes favorable conditions supporting the continuous improvement of the banking industry's operating fundamentals and the resilience of valuations. In the environment of low interest rates and accelerated entry of medium and long-term funds into the market, the dividend characteristics of the banking sector with high dividends and low valuations still have a continuous appeal to long-term funds such as insurance, accelerating the restructuring of valuations. The firm continues to be bullish on the dividend value of the banking sector and maintains a buy recommendation. Main points of China Galaxy Securities: The monetary policy meeting is basically consistent with the guidance in the fourth quarter The central bank's concern for the external environment has increased, but the policy remains moderately loose, reflecting a policy orientation that revolves around domestic considerations to support the expansion of domestic demand better. In the short term, the impact of input-style inflation is limited, consistent with the firm's previous report. Based on this, banks will continue to maintain a trend of stable credit growth, structural optimization, and improvement in interest rate spreads, with a fundamentally good support for valuation recovery. As of April 2nd, the banking sector saw an increase in several trading days compared to the low point of the previous week, with an accumulated increase of 4.55%. The sector's valuation has surpassed its position before the March adjustment, reflecting a degree of improvement in fundamentals and valuation resilience amidst growing demand for risk aversion. The current phase of monetary policy has an overall positive impact on banks. Moderately loose monetary policy continues to create a stable monetary environment for credit growth and structural optimization for banks The meeting continues to emphasize the maintenance of ample liquidity to ensure that the scale of social financing and the growth of the money supply are in line with the economic growth and the expected target of the overall price level. In the first quarter of this year, the central bank's Medium-term Lending Facility (MLF) operations accumulated 2 trillion yuan, higher than the same period in the past two years. At the same time, it injected a net of 600 billion yuan through reverse repurchase agreements to fully meet the liquidity needs of financial institutions and support the real economy. Additionally, the meeting expressed the need to make good use of various structural monetary policy tools and added the description of "optimizing tool management." At the beginning of the year, the central bank reduced the interest rates on structural monetary policy tools by 25 basis points. It is expected that these structural tools will continue to be an important lever to provide precise financial support to the real economy, guiding banks to lean credit resources towards key areas such as agriculture, domestic demand, innovation, and small and micro-enterprises, accelerating credit structural optimization. The trend of improving interest rate spreads remains unchanged, and interest rate risk is controllable The meeting continues to emphasize the strengthening of policy rate guidance and improvement in market-based interest rate transmission. It also emphasizes the need to regulate the operational behavior of the credit market, reduce financing intermediary costs, and promote low overall financing costs. The central bank maintains pricing order, continuing to protect banks' interest rate spreads to alleviate the downward pressure on asset-side yields. At the same time, optimizing debt costs remains a core variable supporting interest rate spread improvement. In addition, the meeting continues to pay attention to changes in long-term bond yields, focusing on financial market risks from a macroprudential perspective. Since October 2025, the central bank has resumed open market trading of government bonds, using the government bond yield curve as a pricing benchmark. With a net injection of 150 billion yuan since the beginning of the year, the yield of 10-year government bonds has remained stable at around 1.8%-1.9%; combined with strengthened bank duration control and bond investment mainly for portfolio purposes, it is expected that the overall impact of interest rate hikes and input inflation on the bank's bond market business is manageable. Focus on bank capital supplementation to enhance the ability to serve the real economy and resist systemic risks The meeting continues to propose to strengthen the capital strength of banks. Although the internal capital supplementation capability of banks has marginally improved, it still faces the requirements of supporting key areas of the real economy, risk prevention and resolution, and stable dividend distribution, with lingering capital pressures. The National People's Congress of China has proposed issuing 300 billion yuan of special government bonds to supplement the capital of state-owned major banks, increasing capital supplementation through multiple channels. Subsequently, there is no ruling out the possibility of capital supplementation for small and medium-sized banks through various channels such as local special bonds. Investment recommendation: Stocks recommended are Industrial and Commercial Bank of China, Agricultural Bank of China, Postal Savings Bank of China, China Merchants Bank, Bank of Ningbo, Jiangsu Changshu Rural Commercial Bank. Risk warning: Economic performance below expectations, risk of deteriorating asset quality; downward pressure on interest rates, risk of NIM compression; impact of tariffs, risk of weakening demand.