Zhongtai: From the perspective of fundamentals and investment, the absolute returns of bank stocks focus on two investment themes.

Zhongtai released a research report stating that the bank's certain performance throughout the year will bring stable returns for bank stocks in 2026, which is short-term and market style dependent; the economic development model will continue (with strong policy consistency), strong corporate business and a persistent low-risk preference among residents will drive a rebound in net interest margins and sustained revenue growth, which are highlights of strong performance certainty. There are two main investment themes for bank stocks: one is regional banks with competitive advantages and strong certainty, particularly in regions such as Jiangsu, Shanghai, Chengdu, Shandong, and Fujian. The second is based on high dividends and stability, with a strong recommendation for large banks. Zhongtais main viewpoints are as follows: Fundamentals of performance The performance is robust and resilient, a cyclically related variety as well as a weakly cyclical variety. Excluding the golden growth era from 2009 to 2013, the net profit growth rate of the industry since 2014 has generally stabilized in a positive growth range of about 0-10%. The bottom line comes from threefold support: First, the customer base is fully covered under the indirect financing system, if it doesn't shine in the East, it may in the West, with a resilient growth in scale due to switching credit entities; Second, net interest margin business is cyclical while non-interest business is counter-cyclical. During the interest rate decline period, bond investment returns enhance income to hedge against the decline in net interest margin, ensuring stable revenue; Third, the provision reserves are substantial, with industry provisions of about 5.3 trillion yuan and excess provisions of about 2 trillion yuan, corresponding to an industry net profit of about 2.2 trillion yuan, allowing for significant adjustment space. Mid-term estimates: Without relying on provision releases, both revenue and profit can maintain small positive growth, with ROE exceeding 8% over three years. Fundamentals of dividends Stable dividends and substantial dividend yields. The demand for increased dividends comes from shareholders, while financial supervision requires profit retention to supplement capital for financial stability. Under multiple negotiations, banks are more inclined to maintain stable dividend ratios, which have remained above 28% for the long term. In terms of dividend yield, high-quality regional rural commercial banks and some joint-stock banks have yields of 5-6% (such as Industrial Bank, China Merchants Bank, Ping An, Shanghai, Chengdu, Shanghai Agricultural, Chongqing Agricultural, Jiangsu, Nanjing, etc.), while large state-owned banks yield around 4%, still more than 230 basis points above the ten-year government bond yield. Investment perspective Relatively resilient varieties in a bleak market, with bank alpha varieties not losing out in a bull market. During the three rounds of market downturns in 2015-2016, 2018-2019, and 2021-2024, banks fell less significantly (with declines significantly lower than the CSI 300). Among them, the resilient stocks were quality banks supported by earnings. During the bull market, although the overall sector could not outperform the market, there are alpha varieties within the sector that can outperform the market significantly. In terms of funding positions, the reduction of holdings by the China Securities Finance Corporation is nearing its end, and the size of broad-based index funds has fallen to a level prior to the 2024 market rescue, effectively eliminating disturbance from relevant national institutions. There is a short-term seesaw effect with technology, while long-term pricing still revolves around ROE and dividends. Individual stock level Seek targets along the performance certainty line. The net interest margin and asset quality exhibit strong beta characteristics, with the current alpha endowment of the sector mainly in scale expansion: large banks have a natural cost advantage, and quality regional rural commercial banks enjoy regional alpha. Key recommendations include large banks (Industrial, Agricultural, China, Construction) + quality regional cities commercial banks (recently with high cost-performance such as Jiangsu, Nanjing, Qilu, etc.). Risk warning: Economic downturn may exceed expectations, data updates may not be timely, and estimations may have deviations, among others.