Guosen: High dividends solidify allocation value; profit recovery opens upside for banks.

Guosen released a research report stating that the banking sector still has allocation value in the fourth quarter, and stock selection should balance dividend returns with earnings elasticity. In a low-interest-rate environment, high-dividend banks have long-term allocation value. For the base position, priority should be given to banks with stable dividends, solid asset quality, and attractive dividend yields, with key recommendations including China Construction Bank Corporation (601939.SH), Bank Of China (601988.SH), and other major banks, as well as China Merchants Bank (600036.SH) with stable performance; at the same time, attention should be paid to changes in policy expectations. If the trend of bank performance recovery becomes further clarified, then on the basis of retaining high-dividend base positions, increase allocation to stocks with high earnings elasticity. Guosen's main views are as follows: In terms of win rate, profit stabilization consolidates the foundation for dividends, and low interest rates highlight dividend value The certainty that listed banks' net interest margins will continue to stabilize is high, and earnings expectations are shifting from continued pressure to bottoming and improvement, further consolidating the foundation for stable cash returns. At the same time, as credit growth slows, the pressure of bank capital consumption is expected to ease, and combined with profit stabilization, dividend capacity is supported. In the semi-annual reports, many banks slightly increased their dividend payout ratios, further enhancing the attractiveness of bank dividends in a low-interest-rate environment. The bank expects third-quarter report performance growth to be basically flat versus the semi-annual reports, further consolidating the sustainability of bottoming and improvement in performance. The mid-term dividend positioning in October, third-quarter report performance, and expectations for the insurance opening campaign in December are expected to provide phased catalysts. In terms of odds, the core focus is on macroeconomic policy expectations. If policy drives upward earnings revisions, a "Davis double play" may follow. The important meetings in October and December are key windows for observing the intensity of policy support and the direction of the next year's economic work. If policy support can drive a recovery in effective financing demand, improvement in corporate cash flow, and mitigation of credit risk, combined with stabilizing interest margins, bank profit repair is expected to accelerate further, ushering in a "Davis double play." However, policy benefits do not necessarily lead to relative outperformance of the banking sector; high-elasticity pro-cyclical industries may perform more strongly, but 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 has allocation value in the fourth quarter, and stock selection should balance dividend value and earnings elasticity. In a low-interest-rate environment, high-dividend banks have long-term allocation value. For the base position, priority should be given to banks with stable dividends, solid asset quality, and attractive dividend yields, with key recommendations including China Construction Bank Corporation, Bank Of China, and other major banks, as well as China Merchants Bank with stable performance; if policy support intensifies and recovery expectations rise, then on the basis of retaining high-dividend base positions, increase allocation to stocks with high earnings elasticity. Absolute return foundation is solid: performance stabilization consolidates the attractiveness of high dividends It is expected that third-quarter report performance growth will be basically flat versus semi-annual report growth, strengthening expectations for the sustainability of stable cash returns. In "Banking Industry 2026 Operating Outlook: Price Chapter - Monetary Policy Makes Discretionary Choices, Net Interest Margin Decline Nears Its End" (December 5, 2025), it was already pointed out that this round of decline in listed banks' net interest margins is nearing its end, and bank performance will usher in a trend-based improvement. In the first quarter of 2026 and the semi-annual reports, performance showed a trend of bottoming and improvement. In the first half of the year, listed banks' revenue grew 7.4% year over year, and net profit attributable to parent companies grew 1.5% year over year, increasing by 6.0 percentage points and 1.5 percentage points respectively compared with 2025 growth rates. Looking ahead to the third-quarter reports, performance growth is expected to be basically flat versus the semi-annual reports. (1) Net interest income growth is expected to slow slightly: due to a decline in the contribution from liability-side repricing, third-quarter net interest margin is expected to decline slightly by 1-2 bps quarter over quarter. At the same time, year-over-year asset growth is also expected to decline slightly, so net interest income growth is judged to slow modestly compared with the semi-annual reports; (2) Non-interest income: due to factors such as a high base, other non-interest income growth slowed in the semi-annual reports. Considering the lower base for other non-interest income in the third-quarter reports, as well as the accrual of unrealized gains from equity investments represented by CXMT Corporation, other non-interest income growth in the third quarter is expected to increase. Overall, it is expected that listed banks' revenue growth in the first three quarters will be basically flat versus the semi-annual reports. (3) In terms of asset quality: the high quality of corporate business continues, while retail non-performing loan generation continues to be exposed, especially in the credit card segment. Listed banks maintain steady provisioning intensity, and profit release is stable. Profit bottoming and improvement, combined with the trend-based decline in credit growth, effectively strengthen expectations for an increase in dividend payout ratios. Several banks slightly raising dividend payout ratios in the semi-annual period further reinforces this expectation. At present, China's endogenous economic growth momentum is not strong, and household deleveraging is still continuing. Therefore, it is expected that China's monetary policy will remain reasonably accommodative, and the 10-year government bond yield is expected to remain at current levels with slight fluctuations, lacking a basis for a significant rise. The certainty of bank stock performance bottoming is strong. At the same time, after the deepening of China's industrial upgrading, traditional credit demand is trending downward, and capital consumption has slowed somewhat. Therefore, banks have a solid foundation for increasing dividend payout ratios. Trading catalysts: seasonal events provide catalysts The two event windows of mid-term dividend grabbing in 2026 and advance allocation at year-end driven by insurance opening campaign planning may bring increased allocation demand for bank stocks, which will further raise the win rate of bank stocks. Looking back at bank stock performance during previous bank dividend periods, dividend-grabbing rallies often start about 2 months before the equity registration date, generally lasting 30-45 trading days, and previous dividend-grabbing rallies have low correlation with the prior performance of the SW Banking Index. The pace of mid-term dividends in 2026 is likely to be earlier, and October is still a relatively good time to position for the mid-term dividend-grabbing rally. Insurance opening campaign advance allocation at year-end is often an important source of incremental funds for bank stocks. From the perspective of institutional behavior, year-end rebalancing momentum is relatively weak, and institutions generally focus on protecting full-year performance. Insurers, however, will make forward-looking arrangements based on the next year's investment budget and adjust asset allocation before opening campaign funds are in place, which often creates phased inflows from year-end to the beginning of the year. From 2022 to 2024, bank stocks recorded good returns from December to January of the following year for three consecutive years; performance in the same period of 2025 was poor, mainly because (1) market style shifted significantly, and expectations for the sustainability of the growth sector were strong; (2) at that time, listed banks' performance expectations were still in a downward trend, so after continuous valuation repair, the attractiveness of bank dividend yields declined somewhat. Compared with 2025, although listed banks' valuations are now close to the level of the same period last year, the certainty of improved expectations for listed banks' fundamentals bottoming in 2026 is strong; moreover, with the trend-based decline in loan growth, expectations for higher dividend payout ratios have a solid foundation, and bank stock dividend yields remain strongly 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 bank judges that the absolute return foundation for bank stocks in the fourth quarter lies in expectations for bottoming and improvement in profits and high dividend returns, while upward stock price elasticity depends on whether policy can drive better-than-expected profit repair and on market allocation demand for dividend assets. At the policy level: focus on whether stable-growth policy can bring sustained upward revisions to bank profit expectations. The important meetings in October and December are key windows for observing the intensity of policy support and the direction of the next year's economic work. If policy support drives a recovery in effective financing demand, improvement in corporate cash flow, and mitigation of credit risk, combined with stabilizing interest margins, bank profit repair is expected to accelerate further, ushering in a "Davis double play." However, policy benefits 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 relatively high earnings elasticity and relatively low valuations. At the style level, comparative advantage under low interest rates still favors valuation repair. In an environment of low real returns and unclear profit improvement in other industries, banks with bottoming and stabilizing profits and expectations of higher dividend payout ratios remain attractive to long-term funds such as insurers. Therefore, as long as dividend yields still provide sufficient compensation relative to bond yields, the dividend allocation logic is expected to continue. If economic recovery expectations rise and long-end interest rates move up, the comparative advantage of high dividends may weaken, and upward elasticity will then depend more on the magnitude and sustainability of performance improvement. In addition, for banks that rose significantly earlier and whose dividend yields have clearly declined, caution is also needed regarding fund realization after concentrated holdings. Therefore, in the fourth quarter, it is appropriate to balance dividend returns and earnings elasticity. Risk warnings Stable growth falls short of expectations, and downward pressure on bank asset quality increases. Banking is a heavily regulated industry. If subsequently issued policies are unfavorable to short-term bank fundamentals, this will impact short-term bank valuations. International political turmoil and increased overseas uncertainty require vigilance against the impact of changes in the overseas situation on risk appetite.