Zhongtai Securities Co.,Ltd. has released a research report indicating that the banking sector's stable full-year earnings performance is expected to deliver solid returns for bank stocks in 2026, with short-term movements closely tied to prevailing market conditions. The prevailing economic development model is expected to persist, supported by strong policy resolve, and robust corporate banking operations alongside persistently low risk appetite among households are anticipated to drive a cyclical recovery in net interest margins. This should keep revenue growth as a standout metric, underpinning strong earnings visibility across the sector.

Two primary investment strategies are highlighted for bank stocks. The first focuses on city and rural commercial banks with regional advantages and strong earnings certainty, particularly those operating in regions such as Jiangsu, Shanghai, the Chengdu-Chongqing area, Shandong, and Fujian. The second strategy revolves around the appeal of high dividend yields and stability, with a strong preference for major large-cap banks.

Fundamental Earnings Stability

Banking fundamentals demonstrate both resilience and flexibility, positioning the sector as both a cyclical and defensive play. Excluding the exceptional high-growth era between 2009 and 2013, the industry has maintained a net profit growth rate consistently within the 0-10% positive range throughout the extended economic cycle since 2014. This bottom-line resilience is supported by three key pillars. First, the indirect financing system provides comprehensive client coverage, allowing for seamless transitions between credit sectors and ensuring sustainable scale growth. Second, while interest-based businesses follow economic cycles, non-interest income acts as a counter-cyclical buffer, with bond investment gains offsetting margin compression during rate-cutting periods to keep revenue stable. Third, substantial provision reserves, totaling approximately 5.3 trillion yuan in industry provisions and 2 trillion yuan in excess provisions against 2.2 trillion yuan in net profits, offer considerable flexibility to smooth earnings through cyclical downturns.

Medium-term projections suggest that banks can maintain modest positive growth in both revenue and profits without relying on provision releases, with return on equity expected to remain above 8% over a three-year horizon.

Dividend and Yield Attractiveness

Dividend policies remain consistent, offering substantial yields to shareholders. While shareholders push for higher payouts, financial regulators emphasize profit retention for capital adequacy, and the resulting dynamic has led banks to favor maintaining stable dividend ratios, which have consistently stayed above 28% over the long term. In terms of dividend yield, high-quality regional city and rural commercial banks, along with select joint-stock banks—including Industrial Bank, China Merchants Bank, Ping An Bank, Bank of Shanghai, Bank of Chengdu, Shanghai Rural Commercial Bank, Chongqing Rural Commercial Bank, Bank of Jiangsu, and Bank of Nanjing—offer yields ranging from 5-6%. Major state-owned banks provide yields around 4%, still exceeding the ten-year government bond yield by approximately 230 basis points.

Investment Positioning and Market Dynamics

Bank stocks serve as relative safe havens during flat or declining markets while still delivering competitive performance in bull markets. During three distinct market downturns between 2015-2016, 2018-2019, and 2021-2024, banks consistently outperformed the CSI 300 Index, with the most resilient stocks being quality banks backed by solid fundamentals. Although the sector as a whole may lag the broader market during bull phases, selective stocks within the sector with alpha-generating capabilities can outperform significantly.

From a positioning perspective, China Securities Finance Corporation's share reductions are nearing completion, and broad-based index fund sizes have returned to pre-2024 market rescue levels, effectively eliminating disturbances from state-related institutional capital. In the short term, there exists a seesaw effect with technology stocks, but long-term pricing remains anchored to return on equity and dividend metrics.

Stock Selection and Recommendations

At the individual stock level, the focus should be on earnings certainty. Net interest margins and asset quality carry strong beta characteristics, while current alpha opportunities within the sector primarily stem from scale expansion. Major banks benefit from inherent funding cost advantages, while high-quality regional city and rural commercial banks enjoy distinct regional alpha. Key recommendations include major state-owned banks—Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank—alongside high-quality regional city commercial banks where near-term valuations appear attractive, such as Bank of Jiangsu, Bank of Nanjing, and Qilu Bank.

Key risks include a sharper-than-expected economic slowdown, potential delays in data updates, and possible deviations in forecast calculations.