Huachuang Securities: Focus on bank sector allocation opportunities, focusing on three investment themes in 2026.

Huachuang Securities released a research report stating that the core logic of medium to long-term fund entry into the market and public fund reform remains unchanged, emphasizing the opportunity for bank sector allocation, with a large undersupply of banks. It is expected that 2026 will still be a year of systematic valuation rebound for the bank sector: from defense to offense, with fundamentals warming up and funds driving together. 1) The characteristics of high dividend yield and low valuation are still the foundation of bank stocks, especially in the background of declining risk-free interest rates, the bond-like properties of bank stocks will continue to attract stable funds. 2) With the stabilization of interest spreads, the recovery of regional credit demand, and growth in non-interest income, some high-quality banks are expected to show strong performance elasticity, and valuations are expected to switch from PB logic to PE logic. Huachuang Securities' main points are as follows: Margins of profitability of the banking industry are improving The 2025 annual reports and 1Q26 performances of 42 listed banks show that the profitability margins of the banking industry have started to show improvement: revenue and profit growth are picking up, net interest margins are improving on a quarterly basis, wealth management business is developing well, overall asset quality is stable, and the industry is gradually moving away from the previous stage of "continuously declining interest margins and sustained profit pressure." More worthy of attention than short-term performance improvement is the deep-seated change in the banking industry's business paradigm In the past decade, the major growth driver of Bank of China relied on credit expansion, with "scale priority" as the core operating logic of the industry. However, the current banking environment has significantly changed: net interest margins are at historical lows, effective financing demand is insufficient, real estate credit cycles are shifting, capital supervision is tightening, and the difficulty of capital replenishment is increasing marginally, meaning that relying solely on high-speed expansion to boost shareholder returns is becoming ineffective and will accelerate capital consumption. In this context, banks are gradually shifting their business strategies from "increasing quantity to compensate for price" to "maintaining quantity and price stability." Changes in the assets and liabilities structure highlight changes in banking business strategies Looking at the changes in the assets and liabilities structure of listed banks in the past three years, it is clear that banks are moving away from the previous dual priority of "scale" and "efficiency" towards a dynamic balance of "quality, efficiency, and scale". 1) On the asset side, as overall credit growth slows down, in order to stabilize interest margins, banks are more inclined to allocate relatively high-yield assets, with corporate loans becoming the main direction of investment in a weak retail credit demand and rising risks; 2) On the liability side, deposit growth is slowing down, the proportion of high-interest long-term deposits is decreasing, while the proportion of interbank liabilities is increasing, essentially reflecting the transition of retail wealth allocation from "deposits" to "asset management" within the banking system. The results of the adjustment in the assets and liabilities structure are stable and rising net interest margins, profit growth recovery, and stable asset quality in a single quarter, but still facing pressure of capital consumption. As a result, the banking industry's business goals are gradually transitioning from "scale growth" to "capital return," highlighting the significant importance of ROE stability. Looking ahead, industry differentiation is expected to further intensify In the background of positive signals in the macroeconomy, Bank of China, through restructuring its assets and liabilities and transitioning its business model, has crossed the cycle bottom, showing signs of bottoming out. The steady recovery of net interest margins and the rise of core business income focusing on wealth management collectively constitute the "double pillar" of profit recovery. However, the recovery is structural, and whether future performance can achieve sustained and healthy growth will depend more on the real capabilities of each bank in customer depth management, asset differentiation pricing, risk control, and breakthroughs in light capital businesses, making internal industry differentiation more significant. The bank recommends focusing on the following three investment themes in 2026 Theme One: National credit and dividend cornerstone, represented by state-owned major banks and China Merchants Bank. Theme Two: High-quality joint-stock banks and city commercial banks with early recovery in net interest margins, flexibility in wealth management business, and lower credit costs driving stable ROE, reflecting cost advantages and risk control advantages. Recommended focus: China Merchants Bank, CITIC BANK, Ping An Bank, Bank of Ningbo, Bank of Jiangsu, Bank of Nanjing. Theme Three: City and rural commercial banks with continuous benefits from regional policies and high performance elasticity. Recommended focus: Bank of Chengdu, Bank of Chongqing, Bank of Hangzhou, BQD, Chongqing Rural Commercial Bank. Risk Warning: Increased economic downturn pressure, retail risk exposure beyond expectations, and credit distribution falling short of expectations. Considering differences in assumptions, calculated results may deviate from actual results, provided for reference only.