Western: Banks balancing offense and defense, seizing structural allocation opportunities.

Western released a research report stating that the overall beta effect of the sector has weakened, and the trading of bank stocks is uneven. The current stock selection strategy of the banking sector has shifted from the dominance of dividend style and top-down stock selection thinking to the new logic of structural asset allocation, leading to a continued increase in valuation differentiation among individual bank stocks. The main reasons for this are the switch in market styles, the strengthening of trends in the technology industry, the continuation of the macroeconomic recovery trend, the lack of significant improvement in private sector credit contraction, the unresolved inflation expectations, and the downward pressure on the central ROE of banks. Western's main points are as follows: Strategic Outlook The bank believes that the long-term valuation anchor in the sector is still locked in the dividend yield ratio, mainly because domestic long-term funds have absolute controlling rights over bank assets, and their persistent demand for high dividend investments will continue to affect the pricing of bank stocks in the medium to long term. However, in the first quarter of 26Q1, core institutions have temporarily reduced their holdings of bank stocks through direct equity trading, broad-based ETF operations, and insurance funds have also shown a decline in momentum in bank allocations. From a short-term perspective (such as in the second half of this year), public funds pursuing relative returns, among other high-frequency funds, may have their marginal pricing power marginally expanded, favoring targets with strong profit release expectations. In addition, the bank also recommends focusing on the outflow of some funds from the technology sector due to internal rotation, as well as the phase of market sentiment towards safety, combined with the long-term sustainability of the dividend base color of bank stocks. Under this logic, it is advisable to allocate a bottom position to high dividend targets with stable performance within the sector. Investment Strategy: Western recommends focusing on three main themes 1) Public entities continue to maintain strong wide credit demand, while regional city rural commercial banks with high-quality regional project financing capabilities are expected to still have relatively sufficient profit release elasticity. Recommended stocks include Bank Of Hangzhou, Chongqing Rural Commercial Bank, Bank Of Nanjing, BQD, Bank Of Ningbo, Xiamen Bank Co., Ltd., and Bank Of Chongqing. In addition, considering the temporary improvement in net interest margin in the first quarter, the expectation of accelerated growth in net interest income, coupled with the low base effect in the previous period, it is advisable to position early in shareholding banks with potential for sustainable performance recovery, with a focus on Ping An Bank. 2) The long-term pricing power of bank stocks is still in the hands of "patient capital that seeks absolute returns and has a style bias towards stability. Compared to physical assets, medium and long-term debt, and non-standard assets with high dividend characteristics, bank stocks with high profit stability and certainty are still premium targets for long-term funds. The dividend strategy of "holding shares for dividends" is expected to continue, and under this strategy, it is advisable to allocate a bottom position to large bank stocks with high dividends. Recommended stocks include BOC HONG KONG(H), China Merchants Bank, CITIC BANK(H), and China Construction Bank Corporation(H). 3) Anticipated strong redemption expectations for convertible bonds may catalyze related stock market movements; Recommended stock: Bank of Shanghai. Banking fundamentals have entered a "new normal" 1) Operations: Private sector credit contraction, banks concentrating on government credit business, interest margin is no longer a drag on revenue, and the optimization space of deposit interest costs is shrinking. In the medium term, it is expected that the interest margin of banks will enter a stable state, but overall, it is easier to decline than to rise. The stock market is active, residents continue to move their funds marginally in a low interest rate environment, and the prosperity of wealth management services continues to recover. 2) Risk management: The core focus is shifting from "rapidly clearing new non-performing loans" to "resolving existing risks"; the peak of non-performing loans in the commercial real estate sector may have passed, and retail real estate-backed loans may become a focus of bank risk control. It is expected that banks will increase provisions prudently under cautious credit environment, leading to a moderate increase in credit costs. Risk Warning: Macroeconomic risks, policy risks, asset quality risks.