Huachuang Securities: The slowdown in credit growth does not alter resilience; funds are switching and reassessing banks.

Huachuang Securities released a research report stating that the core logic behind the entry of medium to long-term funds into the market and the reform of public funds remains unchanged. The report emphasizes opportunities for allocation in the banking sector, as the under-allocation in banks is still quite significant. Although the high growth trend of AI has diverted some incremental funds, the investment logic for bank stocks continues to rest on "defensive dividends as the foundation, with quality targets relying on performance elasticity." 1) The characteristics of high dividends and low valuations remain the baseline for bank stocks, especially with the backdrop of declining risk-free interest rates, which will continue to attract stable capital to bank stocks. 2) With interest margins stabilizing, a rebound in regional credit demand, and growth in non-interest income, some high-quality banks are expected to show strong performance elasticity, with valuations likely transitioning from a Price-to-Book (PB) logic to a Price-to-Earnings (PE) logic. The institution suggests focusing on three main investment themes in 2026: Theme One: National credit and the cornerstone of dividends, represented by large state-owned banks and China Merchants Bank. Theme Two: Quality joint-stock commercial banks and city commercial banks, which are likely to see interest margins warm up first, the wealth management business releasing large elasticity, and lower credit costs stabilizing ROE, reflecting cost advantages and risk control advantages. Theme Three: City commercial banks that continuously benefit from regional policies and exhibit greater performance elasticity. Huachuang Securities' main points are as follows: Monthly market performance: Market style rebalances, dividend assets dominate. 1) Sector performance: In July 2026, the banking sector rose by 11.6%, outperforming the CSI 300 index by 19.4 percentage points. The A-share market in July showed significant "high-to-low switching" characteristics. The previously crowded tech growth sector experienced some corrections, while undervalued, high-dividend dividend assets re-emerged as a "safe haven" for capital. Looking specifically at the banking sub-sectors, July 2026 saw a significant recovery in overall valuations for the banking sector, with all sub-sectors PB levels trending upwards. The PB valuations for state-owned banks/joint-stock banks/city commercial banks rose from 0.67X/0.48X/0.61X at the beginning of the month to 0.75X/0.54X/0.68X by the end of the month. Bank stocks generally saw increases in July, with the elasticity of undervalued small banks significantly outperforming large banks. The strong rhetoric of the dividend market in July was initially prominent in large state banks and high-dividend targets. Once the sector's beta was confirmed, capital began to spill over along the "certainty cost-effectiveness" chain, with small banks having lower PB and small market caps being the preferred choices for this expansion due to greater recovery potential. The top three performing banks were Bank of Suzhou (+22.0%), Qingdao Rural Commercial Bank Corporation (+20.7%), and Bank of Nanjing (+17.6%). 2) Interest rate environment: In July 2026, government bond yields showed narrow fluctuations. At the beginning of the month, short-term rates rose slightly due to cash return after the quarter-end; however, amidst weak economic recovery, asset shortages, and the central bank's continued support for liquidity, long-term rates remained resilient. Mid-month tax period disturbances caused temporary tightening of funds, but the central bank maintained stability in liquidity through tools such as reverse repos, leading to limited overall pressure on the bond market. In the latter part of the month, as government bond supply pressures eased and expectations for policy easing warmed up, coupled with safe-haven demand stemming from equity market volatility, bond yields fell, with 1-year and 10-year government bond yields remaining low throughout the month. 3) Sector turnover: In July 2026, the activity level of banking sector transactions continued to rise. The trading activity of the banking sector in July improved, both in terms of trading volume and proportion compared to June. As of July 31, the turnover of the banking sector decreased year-on-year by 5.9%, but increased month-on-month by 17.7%, accounting for 1.20% of the total turnover in the A and B share markets, an increase of 24 basis points month-on-month. 4) Sector valuation: The current valuation of the banking sector is at historically low levels. As of August 5, the banking sector (Shenwan Bank Index, 801780.SI) held an overall PE of 6.05 times, at the 36.08% historical percentile over the past 10 years, with a PB of 0.50 times, at a historical percentile of 19.71%. The dividend yield stands at 4.41%, at the historical percentile of 49.61%. Social financing growth moderately declines, with loan "slowing down for quality" becoming the new normal. The months social financing stock growth gently slipped to 7.4%, partly because real estate and platform loans have entered a period of stock contraction, and partly reflecting that the light asset model of emerging industries has reduced credit dependence per unit of GDP. It is noteworthy that the financing structure continued to optimize, with direct financings share of incremental social financing increasing to 11.3% in the first half of the year, signaling a significant enhancement of the willingness for self-financing among market participants, particularly in corporate bond financing. From the credit structure perspective, insufficient internal demand remains the core conflict: weak household consumption and housing purchase intentions, along with insufficient enterprise expansion motivation, have led to a significant year-on-year decline in medium to long-term loans for households and enterprises; under this backdrop, banks have significantly increased bill discounts by +525.3 billion yuan to offset gaps, reflecting a rational choice to meet regulatory credit scale agreements towards the end of the quarter and demonstrating the smooth demand for credit under MPA assessments. On the monetary supply side, M1 and M2 growth rates fell to 4.0% and 8.0%, respectively, indicating that liquidity still needs to be restored. The trend of "disintermediation" in deposits has intensified, and with broad interest rates declining, household savings are continuously migrating towards off-balance sheet asset management products. The high growth of non-bank deposits confirms that funds are actively seeking higher-yielding allocation directions, which also poses new challenges for banks' liability cost management. The slowdown in credit does not undermine the resilience of the banking fundamentals, and the style switch of funds has renewed attention to the sector. The second quarter social financing and credit data reflect that real financing demand in the economy remains weak, but with the narrowing decline in interest margins, recovery in wealth management business, and improvements in bond market investment income supporting bank profitability, it remains stable. The institution believes that the current slowdown in credit growth more signifies an economic structural transformation and optimization of the financing system rather than weakening bank operational capabilities. In the future, "slowing down for quality" may become the new norm for banking operations. From the disclosed semi-annual earnings reports of city and rural commercial banks for 2026, profitability has shown continued resilience. Bank of Chongqing, Chongqing Rural Commercial Bank, and Bank of Jiangsu disclosed revenue growth rates for 1H26 of +10.80% / +7.81% / +9.11%, respectively, compared to -0.77pct / -0.58pct / +0.70pct in 1Q26; net profit attributable to shareholders in 1H26 saw growth rates of +10.28% / +6.09% / +8.09%, compared to -0.12pct / +1.02pct / -0.11pct in 1Q26. On the liquidity front, as the trading congestion of previously high-performing growth sectors increased and market risk appetite declined, capital gradually transitioned towards undervalued, high-dividend assets, leading to a flow of allocation funds back into the banking sector. This round of banking sector dynamics essentially represents a repricing of the asset allocation value of banks under the market's style rebalancing. In the context of low interest rates and an "asset shortage," bank stocks possess valuation advantages, dividend value, and earnings resilience, suggesting that their long-term allocation value may be further enhanced. Risk warning: Increasing downward pressure on the economy, exposure to risks in local government financing and real estate, and credit issuance falling short of expectations.