Shenwan Hongyuan Group Co., Ltd. released a research report stating that in 2026, the alpha (individual stock performance) of the banking sector is expected to outperform the beta (overall market performance). Regarding where the alpha for bank stocks will originate this year, the report suggests focusing on two main investment themes. The first theme involves high-quality city commercial banks that are achieving asset expansion amidst marginal improvements in their fundamental operations. The logic for this theme is a chain reaction: sufficient project resources on the asset side lead to steady balance sheet expansion, resulting in asset/loan growth rates that outperform peers and potentially even lead the sector. This stronger growth helps offset pressure on net interest margins (NIM), or allows for stable margins alongside volume growth. When combined with significant cost improvements on the liability side, this drives robust growth in net interest income.
The second theme focuses on joint-stock banks currently at cyclical lows, which have the potential for a turnaround driven by strengthened real estate policies. Compared to the first theme, this one may involve greater divergence from market expectations and requires close monitoring.
Shenwan Hongyuan's key viewpoints are as follows:
Looking back, why does the firm repeatedly emphasize favoring individual stock selection this year? Firstly, objectively, stock picking was of limited significance in bank investments over the past two years, as A-share banks exhibited "index-like performance" from 2024 to the first half of 2025. Driven by state-owned banks and other heavyweights, the sector's valuation center rose while individual stock premiums narrowed. Secondly, for the 2026 outlook, insurance capital allocation remains a very important driver for the sector. "Stable performance + high dividends" continue to be the core demands for insurance capital allocating to banks. The banking sector currently once again shows characteristics of being undervalued, with the sector's dividend yield returning to 4.8%, a point that should not be overlooked. Thirdly, a more critical change to note is that if the Producer Price Index (PPI) shows a trend improvement and the traditional economy, represented by real estate, recovers, market risk appetite is also likely to increase. Investors would then tend to seek stocks with higher elasticity and growth potential, making bottom-up stock selection more important.
From the perspective of the banking sector, the relatively weak performance of A-share banks since the start of the year was both expected, yet also presents a divergence from expectations. The weakness in bank stocks since the second half of last year was more due to dual disturbances from capital flows and profit-taking. In contrast, the 2025 bank earnings reports and the fundamental outlook for the beginning of 2026 are actually marginally improving. At the current level, Shenwan Hongyuan continues to be optimistic about the absolute return potential of the banking sector and aims to correct investor expectation gaps:
1. "Interest rate cuts and moderately accommodative monetary policy do not equate to continued profit declines." In fact, the firm judges that bank revenue may deliver better-than-expected performance this year. Pressure on NIM persists this year, but regulators are proactively providing support, as stabilizing bank NIM is a prerequisite for "broadening the space for counter-cyclical monetary policy adjustments" (the firm judges this is also one reason for the central bank's more cautious pace of rate cuts this year). Even if rate cuts are implemented, it would be necessary to lower deposit rates accordingly to offset the impact (a 10 basis point cut in the Loan Prime Rate (LPR) would warrant a 15-20 basis point cut in term deposit rates). For banks, a stable interest rate environment provides a window, supported by policy, to stabilize NIM (it is forecast that the year-on-year decline in NIM for listed banks will narrow to a mid-single-digit percentage in 2026). A recovery in net interest income will lead to less pressure on bank revenue growth this year compared to last year. 2. "Risk disposal does not equate to the banking system bearing the burden alone." In fact, the firm judges that risk mitigation can support banks in buying time to manage challenges, ensuring a smooth transition in asset quality. The current risk pressure faced by banks is essentially a growing pain during economic structural transformation. However, the sectors involved (real estate chain, local government financing platforms, etc.) are often "so interconnected that moving one part affects the whole." This implies that this non-performing loan cycle will not simply be resolved through a crude approach of "banks bearing the burden alone and writing off assets comprehensively." The focus of risk resolution has shifted from adjusting the supply side to stabilizing the demand side. For banks, the bottom line of preventing systemic risks is clear. The principle of shared burden among multiple parties suggests that the impact on bank credit costs and profits may be better than market expectations. For banks that originally had stronger risk control capabilities, proactively reduced exposure to real estate and business loans earlier, and maintained "low NPL formation + high loan loss provision coverage," they are better positioned to achieve profit recovery and stable Return on Equity (ROE). 3. "Periodic concentrated outflows of index-tracking capital do not equate to a bearish view on the allocation value of banks." In fact, the firm notes that the premium/discount of many banks relative to the sector has significantly narrowed/widened, indicating renewed and better allocation value. From January 10th to early February, index-tracking funds focused on the CSI 300 and SSE 50 saw net outflows totaling nearly 700 billion yuan. Based on the weight of banks in these indices, this corresponds to net outflows of about 80 billion yuan from bank stocks (for comparison, based on the total holdings of active funds in Q4 2025 being about 3 trillion yuan and active funds' heavy allocation to banks at 1.99%, the estimated market value of bank stocks held by active funds is about 60 billion yuan). Since February, outflows from index-tracking funds have subsided and no longer pose a capital flow constraint on the banking sector. Given the current scenario where the banking sector valuation is deeply below book value (P/B) and the valuation premium of many high-performing banks relative to the sector has significantly contracted, the present time is opportune for identifying high-quality bank investment opportunities.
Investment Analysis Opinion: The firm is optimistic about the banking sector. Stock selection will be highly significant in 2026, with high-quality banks expected to lead the way in recovering towards 1x P/B. Year-to-date, the banking sector is among the worst performers, with valuations falling to only about 0.6x P/B. The current dividend yield for A-share banks is approximately 4.8%, with most banks offering yields exceeding 5%. Allocation to bank stocks by insurance capital is still ongoing. Therefore, regarding stock selection, the advice is to focus on the two main themes: 1. Excellent city commercial banks achieving asset expansion amid marginal fundamental improvements: Chongqing Bank (benefiting from regional economic factors, ongoing profit statement repair, and clear capital replenishment needs via convertible bonds), Bank of Suzhou (solid provisions, dual improvement in revenue and profit, clear logic for balance sheet expansion), Bank of Ningbo (management changes finalized, peak pressure from declining provisions passed, profits bottoming out and improving). 2. Bottom-tier joint-stock banks with potential for a turnaround under strengthened real estate policies: Industrial Bank (significantly impacted by real estate, fundamentals bottoming, clear convertible bond needs, and an index heavyweight), China CITIC Bank (a joint-stock bank with positive profit growth having digested real estate-related burdens earlier), China Merchants Bank (a benchmark joint-stock bank in terms of fundamentals, with a dividend yield higher than major state-owned banks).
Risk warnings: NIM stabilization falls short of expectations; weak real economic demand, economic recovery pace slower than expected; disturbances from risks associated with certain real estate developers; retail risk exposure exceeds expectations.