CITIC SEC: Under the performance catalysis and style balance, the relative returns characteristics of the banking sector in April continue, with significant absolute return potential for the full year.

CITIC SEC released a research report stating that, considering the marginal convergence of interest rate spreads, as well as the revenue growth driven by wealth management, it is expected that the revenue and net profit growth of A-share listed banks in the first quarter will be +3.1% / +2.5%, both higher than the annual performance growth in 2025 (expected to be +1.5% / +1.8%). Performance catalysts combined with market style rebalancing, the relative return characteristics of the banking sector in April continue; in addition, benefiting from low valuation and stable equity characteristics, the absolute revenue space for the whole year is significant. The main points of CITIC SEC are as follows: Scale: The expansion speed of the banking industry may remain overall stable. According to the data on total assets of domestic commercial banks released by the China Banking and Insurance Regulatory Commission, the year-on-year growth rate at the end of February was 9.73%, an increase of 0.6 percentage points from the end of last year. From the perspective of institutions and structure: 1) Large banks and city commercial banks have relatively dominant investment. In terms of domestic data, the total assets of large banks and city commercial banks in February were +12.4% / +9.7% year-on-year, while joint-stock banks and rural financial institutions were +5.0% / +4.2% respectively, with the growth rate of large banks and joint-stock banks improving compared to the end of last year. 2) Bond issuance is strong while credit is stable. According to the data on credit flow released by the People's Bank of China, in February, loans and bond investments of deposit-type financial institutions increased by +6.2% / 15.7% year-on-year, with the continuous issuance of government bonds driving high growth in bond investments. Overall, it is expected that the year-on-year growth rate of total assets of the 42 listed banks at the end of the first quarter will be around 8.5%-9%, slightly lower than the full-year growth rate of 9.5% in 2025 (calculated based on data from 22 banks that disclosed their annual reports). Pricing: Interest spread in the quarter may stabilize marginally. 1) The decrease in asset yield may narrow. Considering that the LPR rate only decreased once in May 2025 by 10 basis points, the impact of loan repricing in the first quarter of this year is expected to converge significantly. According to Xinhua News Agency, the weighted average interest rates for new loans to enterprises and individuals for housing in February were both at 3.1%. 2) Cost of liabilities benefits from high-interest deposits maturing. From the second half of 2025 to the first half of 2026, there is a peak in the maturity of medium and long-term fixed-term deposits. Considering that the interest rate for 3-year fixed deposits is nearly 200 basis points lower than the current rate, the maturity of these deposits is expected to bring about cost savings for banks. Considering the situation of assets and liabilities, it is expected that the net interest margin of the 42 listed banks in the first quarter will be roughly the same as that in the fourth quarter (around 1.35% in absolute terms), and the year-on-year decrease in interest spreads will narrow to around 7-8 basis points. Taking into account quantity and price factors, it is expected that the net interest income growth of listed banks in the first quarter will turn positive to around 2%-3%. Non-interest income: Positive performance in core income while other non-interest income remains stable. 1) Core income growth may remain positive. Looking at the situation of 22 banks that disclosed their annual reports, the year-on-year growth in fee and commission net income for the whole of 2025 was 5.7% (4.3% in the first three quarters). Considering the concentration of fixed-term deposits maturing in the first quarter of 2026 and the continued activity in the capital markets, it is expected that under the drive of wealth management and asset management income, the growth rate of core income for listed banks in the first quarter will remain around 6%. 2) Other non-interest income may grow in low single digits. In the first quarter, the yield on 10-year government bonds decreased slightly from 1.85% to 1.82%, and throughout the quarter, the yield remained in the range of [1.78, 1.90], which had a slight negative impact on commercial bank investment transactions. On the one hand, the low base brought about by fair value changes in the first quarter of 2025, and on the other hand, based on the requirement for stable revenue growth throughout the year, it is expected that the overall growth in other non-interest income for listed banks in the first quarter of 2026 will be around 2%. Quality: Overall stability while retail sector under pressure, provisioning may need to be increased. 1) Macroeconomic stability drives the stability of asset quality. In the first two months of this year, cumulative year-on-year growth in profits of industrial enterprises was +15.2%, cumulative year-on-year growth in export volume was +21.8%, and the manufacturing PMI in March was 50.4%, all pointing to an improvement in economic conditions. It is expected that the overall asset quality of the banking industry will remain stable. 2) Retail credit quality may still be under pressure. Considering that housing prices in major cities are still at a bottoming phase, and the recent survey data from the People's Bank of China on urban depositors' employment expectations indicate a weak recovery process, it is expected that retail credit is still in a phase of risk exposure and disposal. Data from the Credit Reference Center shows that there were 392 announcements of personal non-performing loan transfers in the first quarter of this year (an increase of 137 compared to the same period last year). Taking into account the assessment of asset quality and the improvement in revenue in the first quarter, it is expected that the provisioning strategy of the banking industry will continue to be cautious, and it is expected that the year-on-year increase in credit impairment of listed banks in the first quarter will be around +6%-7%. Profit: Revenue and profit growth are expected to rise in tandem. Based on data from 22 banks that disclosed their annual reports and 6 banks that disclosed their performance bulletins, it is estimated that the full-year revenue and net profit growth for all listed banks in 2025 were 1.5% / 1.8%. Combining the above judgments on scale, pricing, non-interest income, and asset quality for the first quarter, it is expected that the revenue and net profit growth of listed banks in the first quarter will be +3.1% / +2.5% year-on-year, both higher than the previous year. Comparatively, banks with a significant advantage in cost savings on liabilities, stable asset growth, and lower provisioning pressure are expected to see more favorable changes in profit margin. Market: Strengthened allocation of banking sector. Last week, the banking sector fell slightly by 1.14%, ranking 4th out of 30 primary industries in the CITIC industry classification, outperforming the Wind A Index by 1.11 percentage points. Against the backdrop of continued external disturbances, the stability of the banking sector's performance and market stability are favored. Looking at individual bank stocks, the top three A-share banks with the highest increase in share price were Agricultural Bank of China (+5.6%), Bank of China (+4.5%), and Hua Xia Bank (+3.6%), all of which were varieties with improved annual performance growth. As for H-shares, the Hang Seng Mainland China Banks Index rose by 3.83% last week, outperforming the Hang Seng Index by 3.17 percentage points, indicating a more evident effect of performance catalysts. In addition, it is worth noting that since March, the market value of H-share bank stocks held through the Hong Kong Stock Connect has continuously increased from 14.93% to 15.78%, reflecting a potential increase in sector allocation by institutional investors. Risk factors: Sharp downturn in macroeconomic growth; unforeseen deterioration in bank asset quality; unexpected changes in regulatory and industry policies; companies' strategic progress falling short of expectations.