China Galaxy Securities: The logic of improving bank fundamentals continues; remain bullish on the sector's allocation value.

China Galaxy Securities released a research report stating that August financial data continues to confirm a weak credit pattern, but the pace of deposit migration has slowed, and coupled with accelerated fiscal spending, attention should be paid to the leverage effect of subsequent special bonds and new-type policy-based financial instruments on credit. In addition, recent interim report data further releases signals of interest margin stabilization, the logic of improving bank fundamentals continues, and overall performance is better than in 2025, which is conducive to valuation repair. We remain bullish on the allocation value of the banking sector. The main views of China Galaxy Securities are as follows: Growth of outstanding total social financing fell again, and the year-on-year increase in new social financing hit a new high for the year In August, outstanding total social financing grew 7.18% year on year, down 0.24 percentage points from July and lower than the June growth rate; new social financing for the month was 1,657.7 billion yuan, a year-on-year decrease of 908.3 billion yuan, a larger decrease than in any other month since 2026. The weakening of social financing in August had two reasons: first, persistently weak real economy credit demand dragged down the growth rate of social financing; second, government bond financing shifted to a year-on-year decrease. Government bonds remained the main source of social financing increment but fell year on year, while the increment of RMB loans continued to shrink In August, government bond financing was 1,009.7 billion yuan, accounting for 61% of new social financing for the month, still the absolute main contributor to the increase in social financing, but down 357.5 billion yuan year on year; RMB loans increased by only 55.2 billion yuan, down 570.1 billion yuan year on year, reflecting the relatively slow recovery in real economy financing demand; corporate bond financing was 271.2 billion yuan, up 137.4 billion yuan year on year, maintaining rapid growth for several consecutive months, with the effect of replacing loans with bonds continuing, mainly affected by companies' increased willingness to issue bonds in a low interest rate environment, but the overall increment decreased somewhat compared with June-July; equity financing was 63.9 billion yuan, up 18.3 billion yuan year on year; off-balance-sheet financing totaled 37.8 billion yuan, down 178 billion yuan year on year, of which undiscounted bankers' acceptances were 38.2 billion yuan, a sharp year-on-year decrease of 159.1 billion yuan, expected to be related to bill discounting to boost volume. Household financing continued to decline, corporate short-term loans turned negative, and effective credit demand remained weak In August, new RMB loans from financial institutions were 60 billion yuan, down 530 billion yuan year on year, and the balance of loans from financial institutions grew 4.9% year on year, down 0.2 percentage points from July. Structurally, household financing continued to decrease. In August, household loans decreased by 202.9 billion yuan, down 233.2 billion yuan year on year, with short-term loans and medium- to long-term loans decreasing by 121.9 billion yuan and 82.2 billion yuan respectively, down 132.4 billion yuan and 102.2 billion yuan year on year respectively. Households' willingness to add leverage remained persistently low, and in August the floor area and value of commercial housing sales fell 12.1% and 13% year on year respectively. The corporate sector showed weak performance at the short end, medium- and long-term loans contributed to the increment, and bills continued to make a small contribution to volume. In August, corporate loans increased by 260 billion yuan, down 330 billion yuan year on year, of which medium- and long-term loans increased by 320 billion yuan and were the main support, but were down 150 billion yuan year on year; short-term loans decreased by 160 billion yuan, down 230 billion yuan year on year; bill financing was 100 billion yuan, a slight year-on-year increase of 46.9 billion yuan, and there was still some bill volume-boosting behavior. Overall, insufficient effective credit demand remains the core constraint on current credit expansion. The deposit migration process slowed, and fiscal deposit consumption increased somewhat In August, M1 grew 4.1% year on year, up 0.1 percentage points from July, while M2 grew 7.5% year on year, down 0.2 percentage points. The M1-M2 scissors gap narrowed to -3.4 percentage points, and the degree of fund activation improved marginally. On the deposit side, at the end of August, RMB deposits in financial institutions grew 7.7% year on year, slower than in July. New RMB deposits for the month were 1,200 billion yuan, down 860 billion yuan year on year, of which household deposits increased by only 40 billion yuan and corporate deposits increased by 280 billion yuan, recovering somewhat from negative growth in July, while the growth rates of non-bank deposits and fiscal deposits showed signs of weakening, increasing by 560 billion yuan and 110 billion yuan respectively in August, down 620 billion yuan and 80 billion yuan year on year respectively. Deposit migration still exists but the process has slowed, and the pace of fiscal spending has accelerated somewhat, with funds allocated to the real economy. Risk warnings: risks of economic growth falling short of expectations and deterioration in asset quality caused by exposure of retail non-performing loans; risks of interest margins coming under pressure due to declining interest rates.