According to a research note from Guosen Securities Co.,Ltd., the banking sector still offers allocation value in the fourth quarter, and stock selection should balance dividend returns with earnings flexibility.
In a low interest rate environment, high dividend banks possess long-term allocation value. For core holdings, priority should be given to banks with stable dividends, sound asset quality, and attractive dividend yields. The note specifically recommends major banks such as China Construction Bank (601939.SH) and Bank of China (601988.SH), as well as China Merchants Bank (600036.SH) for its stable performance. At the same time, investors should monitor changes in policy expectations. If the earnings recovery trend for banks becomes more clearly established, investors can add high earnings elasticity stocks on top of retaining high dividend core holdings.
The key views from Guosen Securities Co.,Ltd. are as follows:
On the probability side, earnings stabilization reinforces the dividend base, and low rates highlight dividend value.
The net interest margin of listed banks is highly certain to continue stabilizing. Earnings expectations are shifting from sustained pressure toward bottoming out and improving, further solidifying the foundation for stable cash returns. Meanwhile, as credit growth slows, capital consumption pressure on banks is expected to ease. Combined with earnings stabilization, dividend capacity is supported. Several banks have already slightly raised their dividend payout ratios in their interim reports, further enhancing the appeal of bank dividends in a low rate environment. The firm expects third-quarter earnings growth to be broadly in line with interim results, further reinforcing the sustainability of a bottoming and improving earnings trend. The mid-term dividend arrangements in October, third-quarter results, and December insurance "good start" expectations are likely to provide catalysts at different stages.
On the odds side, the core focus is macroeconomic policy expectations. If policy drives earnings upward revisions, a "Davis Double Play" could emerge.
Important meetings in October and December are key windows for observing the intensity of policy support and the direction of economic work for the following year. If policy support drives a recovery in effective financing demand, improves corporate cash flow, and alleviates credit risk, combined with stabilizing interest margins, bank earnings recovery could accelerate further, triggering a "Davis Double Play." However, policy tailwinds do not necessarily lead to relative outperformance of the banking sector. High-elasticity pro-cyclical industries may perform more strongly. Nevertheless, the high win rate of bank stocks provides good trading opportunities. At this point, stock selection within the banking sector should place greater emphasis on earnings elasticity.
The banking sector still holds allocation value in the fourth quarter, and stock selection should balance dividend value with earnings elasticity. In a low rate environment, high dividend banks have long-term allocation value. Core holdings should prioritize banks with stable dividends, sound asset quality, and attractive dividend yields, with key recommendations including major banks such as China Construction Bank and Bank of China, as well as China Merchants Bank for its stable performance. If policy support intensifies and recovery expectations rise, investors can add high earnings elasticity stocks while retaining high dividend core holdings.
Solid foundation for absolute returns: earnings stabilization reinforces the appeal of high dividends.
Third-quarter earnings growth is expected to be broadly flat versus interim results, reinforcing expectations for the sustainability of stable cash returns. In the report "Banking Sector 2026 Operating Outlook: Price Chapter — Monetary Policy Stays Flexible, NIM Decline Nears Its End" (December 5, 2025), it was already noted that the downward trend in listed banks' net interest margins is nearing its end, and bank earnings will see a trend-based improvement. In the first quarter and interim results of 2026, performance showed a bottoming and improving trend. In the first half, listed banks' revenue grew 7.4% year-on-year, and net profit attributable to parent grew 1.5% year-on-year, accelerating by 6.0 percentage points and 1.5 percentage points respectively compared to 2025. Looking ahead to the third quarter, earnings growth is expected to be broadly in line with interim results. (1) Net interest income growth is expected to slow slightly: due to a decline in liability-side repricing contributions, net interest margin is expected to edge down by 1-2 basis points quarter-on-quarter in the third quarter. At the same time, asset growth is also expected to moderate slightly, so net interest income growth is judged to slow modestly versus interim results. (2) Non-interest income: due to high base effects and other factors, other non-interest income growth slowed in the interim report. Considering the lower base for other non-interest income in the third quarter and the recognition of equity investment gains represented by Changxin Technology, other non-interest income growth is expected to increase in the third quarter. Overall, revenue growth for listed banks in the first three quarters is expected to be broadly flat versus interim results. (3) Asset quality: corporate quality remains solid, while retail non-performing loan formation continues to be exposed, especially in the credit card segment. Listed banks maintain steady provisioning levels, and earnings release remains stable. Bottoming and improving earnings combined with a trend-based decline in credit growth effectively strengthen expectations for higher dividend payout ratios. Several banks slightly raising payout ratios in their interim reports further reinforces this expectation. Currently, China's endogenous economic growth momentum is not strong, and household deleveraging continues. Therefore, monetary policy is expected to remain reasonably accommodative, and the 10-year government bond yield is expected to stay at current levels with mild fluctuations, lacking a basis for a significant rise. The certainty of bank earnings bottoming is strong. At the same time, after the deepening of China's industrial upgrading, traditional credit demand is trending downward, and capital consumption is slowing. Therefore, banks have a solid foundation for raising dividend payout ratios.
Trading catalysts: seasonal events provide impetus.
Two event windows — the scramble for mid-term dividends in 2026 and year-end early allocation driven by insurance "good start" planning — may increase allocation demand for bank stocks, further boosting the win rate of bank shares. Reviewing bank stock performance during past dividend periods, the dividend scramble rally often starts about two months before the record date, typically lasting 30 to 45 trading days, and past dividend scramble rallies have shown low correlation with the prior performance of the SW Banking Index. The mid-term dividend schedule for 2026 is likely to be earlier, and October remains a good time to position for the mid-term dividend scramble rally. Year-end early allocation by insurers for the "good start" is often an important source of incremental capital for bank stocks. From an institutional behavior perspective, year-end rebalancing incentives are relatively weak, and institutions generally focus on protecting full-year performance. Insurers, however, make forward-looking arrangements based on next year's investment budget, adjusting asset allocation before "good start" funds arrive, which often creates incremental flows from year-end to early next year. From 2022 to 2024, bank stocks posted solid returns from December to January for three consecutive years. Performance in the same period of 2025 was weaker, mainly because (1) market style shifted significantly, and growth sectors had strong sustained expectations; (2) at that time, listed banks' earnings expectations were still in a downward trend, so after continuous valuation recovery, the dividend yield appeal declined. Compared with 2025, although listed banks' valuations are now close to last year's level, the certainty of improved fundamentals bottoming in 2026 is stronger. Moreover, with loan growth trending downward, expectations for higher payout ratios have a solid foundation, and bank dividend yields remain highly attractive, especially against the backdrop of significantly amplified market volatility in the second half of the year.
Odds: determined by macroeconomic policy expectations and market style.
The firm judges that the foundation for absolute returns in bank stocks in the fourth quarter lies in expectations for bottoming and improving earnings and high dividend returns. Upward price elasticity depends on whether policy can drive better-than-expected earnings recovery and on market demand for dividend assets. At the policy level, the key focus is whether growth-stabilization policy can drive sustained upward revisions in bank earnings expectations. Important meetings in October and December are key windows for observing policy support intensity and the direction of next year's economic work. If policy support drives a recovery in effective financing demand, improves corporate cash flow, and alleviates credit risk, combined with stabilizing interest margins, bank earnings recovery could accelerate further, bringing a "Davis Double Play." However, policy tailwinds do not necessarily lead to relative outperformance of the banking sector; high-elasticity pro-cyclical industries may perform more strongly. At this point, allocation within the banking sector should place greater emphasis on stocks with higher earnings elasticity and relatively low valuations. At the style level, the relative valuation advantage under low interest rates still favors valuation repair. In an environment of low real returns and unclear earnings improvement in other industries, banks with bottoming and stabilizing earnings and expectations for higher payout ratios remain attractive to long-term capital such as insurers. Therefore, as long as dividend yields still provide sufficient compensation relative to bond yields, the dividend allocation logic is likely to continue. If economic recovery expectations rise and long-end rates increase, the relative advantage of high dividends may weaken, and upward elasticity will depend more on the magnitude and sustainability of earnings improvement. In addition, for banks that have already risen significantly and seen dividend yields drop notably, investors should be alert to capital profit-taking after concentrated positioning. Therefore, in the fourth quarter, it is advisable to balance dividend returns with earnings elasticity.
Risk warning: Growth stabilization may fall short of expectations, increasing downward pressure on bank asset quality. Banking is a highly regulated industry. If subsequent policies are unfavorable to short-term bank fundamentals, they could impact short-term bank valuations. International political turmoil and rising overseas uncertainty require vigilance against the impact of changes in overseas situations on risk appetite.