China Galaxy Securities: Bank sector allocation window opens, understanding bank pricing logic from fund flows.

China Galaxy Securities released a research report saying that since Q3 2025, the favorability of funds towards the banking sector has remained at a relatively low level. Recently, passive fund outflows have disturbed the banking sector's funding situation. It is expected that the redemption-outflow space will converge, opening up a window for low-valuation allocation in the banking sector. In the environment of low interest rates and accelerated entry of medium and long-term funds into the market, the dividend attributes of high dividend and low valuation in the banking sector still have sustained attractiveness for long-term funds such as insurance assets, accelerating the valuation pricing restructuring. At the same time, Northbound funds have been active since the beginning of the year and are expected to increase their allocation to the banking sector, with a higher likelihood of increased allocation to some preferred bank stocks. The bank maintains a positive view on the dividend value of the banking sector and maintains a recommended rating. The main points of China Galaxy Securities are as follows: Market style switching, active funds continue to be under-allocated, preference remains at a low point As of 2025 Q4, the total market value of bank holdings by active funds was 30.545 billion yuan, accounting for 1.88%, an increase of 0.07 percentage points month-on-month, still at a five-year low; the under-allocation ratio is 8.88%, an increase of 0.5 percentage points month-on-month. Funds mainly flowed into non-ferrous metals, communications, and non-bank financial industries, with holdings increasing by 2.07 percentage points, 1.89 percentage points, and 1.03 percentage points, respectively, compared to the previous quarter. Since Q3 2025, there has been a clear market style switch, with sector rotation apparent. From the beginning of 2026 to January 28, the Shanghai and Shenzhen 300 Index rose by 1.9%, with non-ferrous metals, oil and petrochemicals, and media industries leading the gains, rising by 28.89%, 12.49%, and 12.22%, respectively. The banking sector fell by 7.68%, underperforming other industries. Overall, the banking sector has remained relatively under-allocated by active funds. Passive fund outflows have caused disturbances in the recent adjustment of the banking sector, with a convergence of redemption-outflow space expected in the future As of January 28, 2026, the net outflow of stock ETFs due to subscription and redemption in the month amounted to 757.99 billion yuan. Based on the weights of the banking sector in various indices, the net outflow of funds from the banking sector due to subscription and redemption is estimated to be approximately 83.14 billion yuan. Considering the scale and weight, the fluctuation of the Shanghai and Shenzhen 300 ETF has a significant impact on the banking sector. Since January, the net outflow of the Shanghai and Shenzhen 300 ETF has been approximately 543.8 billion yuan, resulting in an estimated net outflow of funds from the banking sector of 65.4 billion yuan. The largest four Shanghai and Shenzhen 300 ETFs have concentrated holdings, with the top ten holders averaging about 90%, mainly held by market-oriented financial institutions such as insurance and leading securities firms. The market share of the top four Shanghai and Shenzhen 300 ETFs is now lower than the share held by the top ten holders in the first half of 2025, with an average reduction of about 43%. While selling pressure still exists, the convergence of redemption-outflow space is expected to weaken the impact on the banking sector. The influence of long-term funds on the pricing of banks is further highlighted, and the impact of Northbound funds is also worth watching As fund disturbances accelerate to clear out, the influence of long-term funds on the pricing of the banking sector is increasing, while the influence of active and passive public funds is decreasing. In the medium to long term, long-term funds such as insurance assets are expected to stabilize the valuation center of the banking sector and further enhance it, bringing opportunities for oversold rebounds and opening up allocation windows. For long-term funds represented by insurance assets, in the continued background of low interest rates and asset shortage, stable dividend payments and high dividend yields in the banking sector can be accounted for in OCI to cope with performance fluctuations, and profits from high ROE regions can be shared through the equity method to further enhance investment returns. The average dividend yield of A-share banks is currently 4.62%, and the dividend value remains attractive; with the momentum of the year-of-the-opening-red beginning, credit issuance is expected to stabilize growth throughout the year, the optimization effect of liability costs is expected to support the narrowing of interest rate spreads, and the prospect of fundamental improvement is strengthening; fiscal policy is positive, monetary policy continues to stabilize the interest rate differential orientation, also supporting performance and favoring valuation repair. In addition, foreign capital remains optimistic about the A-share market, with Northbound funds trading actively at the beginning of the year. Referring to historical data, Northbound funds generally have a higher proportion of holdings in the banking sector in Q1 compared to the previous Q4, with an average increase of 1.07 percentage points in Q1 holdings compared to the previous Q4 for the past five years. Among them, some commercial banks are favored by Northbound funds, making it more likely for them to benefit from increased allocation by foreign investors. Investment recommendations: For individual stocks, Industrial and Commercial Bank of China, Agricultural Bank Of China, Postal Savings Bank Of China, China Merchants Bank, Bank Of Jiangsu, and Bank Of Ningbo are recommended. Risk reminders: Economic performance below expectations, risk of deteriorating asset quality; risks of declining interest rates and NIM pressure; risks of tariff impacts and weakening demand.