Zhongtai: The banking sector remains stable and steady. Focus on the market trend of dividends and valuation switching.

Zhongtai released a research report stating that the bank's certain performance for the year will bring steady returns for bank stocks in 2026, which is short-term and market-style related. The continuous economic development model (strong policy determination), strong corporate business, and continued low-risk preference of residents will drive the rebound of interest rate spreads and revenue growth, which is a highlight, with strong performance certainty. There are two main investment themes for bank stocks: first, regional advantage and strong certainty of city/rural commercial banks, including regions such as Jiangsu, Shanghai, Chengdu-Chongqing, Shandong, and Fujian. Second, high dividend and stable logic, with a focus on recommending large banks. Zhongtai's main views are as follows: Capital Structure In the first quarter of 2026, holdings of the National Social Security Fund, passive funds, and Northbound funds decreased, while holdings of insurance funds (core increments) and active funds increased, with expectations of relatively small future funding pressures. 1. State-owned funds: in the first quarter of 2026, CIC's holdings remained relatively stable, with the National Social Security Fund reducing holdings in 7 joint-stock banks and 1 city commercial bank, and exiting the top ten shareholders list of 5 banks. The holding ratio has reached a low level in recent years, with limited expected future selling pressure. 2. Insurance funds: holdings have continued to rise since the third quarter of 2025, becoming the main incremental funds in the banking sector. In the first quarter of 2026, 6 insurance institutions increased their holdings of 11 listed banks. 3. Public funds: the market value and proportion of active funds in the first quarter of 2026 have slightly increased compared to the previous period, while passive funds have decreased significantly due to the contraction of wide-based scales. As of June 26, 2026, the market's main wide-based funds have basically returned to pre-increase levels, with expectations of low future selling pressure and minimal impact on the sector. 4. Northbound funds: market value and proportion of holdings in the first quarter of 2026 have slightly decreased compared to the previous period. Fundamentals It is expected that the revenues of listed banks in the second quarter to fourth quarter of 2026 will slightly decrease compared to the first quarter of 2026, but still maintain double-digit growth, with year-on-year growth rates of +7.1%, +6.2%, and 5.3% respectively. Net profit is expected to remain relatively stable, and listed banks are expected to continue to be rich and fragmented, with year-on-year growth rates of +3.2%, +3.1%, and +3% for the second quarter to fourth quarter of 2026. 1. Interest income: if the interest rate is lowered by 15 basis points in the second half of the year, the interest rate spread is expected to slightly decrease by less than 5 basis points in the second half of the year (a smaller decrease than in 2025), and with the credit growth rate slightly decreasing, overall interest income will still maintain strong resilience. 2. Fees: core intermediary income (wealth management, public funds, premium income, etc.) is maintaining steady growth, which is expected to support positive growth in intermediary income. 3. Other non-interest income: may be slightly pressured in the second quarter due to a high base, but looking ahead to the second half of the year, under two main support factors (continuing weakness in credit demand, ongoing asset scarcity plus economic K-shaped differentiation), the background does not support a significant weakening of the bond market, and floating profits are sufficient to fully offset fluctuations, so it is expected that other non-interest income will not cause significant disturbance to revenue. 4. Asset quality: Retail risks continue to be exposed, non-performing loan ratios for corporate loans continue to decline, and under the support of corporate loans, banks can control credit costs. In 2025, the retail non-performing loan ratio continued to rise to 1.36%, with retail non-performing loans accounting for 38.9% of total non-performing loans. However, the increase in retail non-performing loan ratios and amounts has slowed down, with observations on its sustainability: observing the increase in non-performing loan ratios over the past four and a half years, there has been a slight slowdown in the second half of 2025, at 11, 11, 12, and 9 basis points respectively. Observing the net increase in non-performing loan amounts over the past four and a half years, it is 548, 880, 840, and 498 billion, with all four categories of loan non-performing loan amounts decreasing. In the second half of the year, attention can be paid to the dividend trend and valuation switch trend of the banking sector 1. Dividend trend: starting in 2023, the spring rush (April-May) has significantly strengthened, with the average increase in May rising from +0.4 to +2.3, marking the beginning of the dividend trend. Similarly, the weakness in August has also intensified in recent years (0.43.3, with a success rate of 0%), due to capital outflows after the dividends are received. The strengthening of the dividend trend in recent years is due to the convergence of volatile growth in performance after the provisioning normalization, with the dividend yield still above the appropriate anchor point (ten-year government bond yield +200bp). 2. Valuation switch trend: in January, both the success rate and odds of bank stocks are high, corresponding to the valuation switch and early-year configuration. The valuation switch trend of banks is derived from the natural growth of bank scale, meaning the growth rate of bank size is basically consistent with social financing growth rate, with stock price = net assets PB, and after PB stabilization, net asset growth will be reflected in stock prices. Risk warning: economic downturn exceeding expectations; financial regulation exceeding expectations; research report information update lagging.