CITIC SEC: The quality and efficiency of the banking sector's operations are maintaining a stable trend, with the sector's allocation having a relatively high cost-effectiveness ratio.

CITIC SEC released a research report stating that the 11 banks' performance reports that have been disclosed show that the operation quality of the banking industry remains stable. Looking ahead to 2026, it is expected that the first quarter will start strong in credit and the banking industry will have a good operating environment, with stable interest spreads and asset quality, revenue and profit growth recovering, and the foundation of core equity asset value solidifying. The peak of fund outflow is over, and combined with changes in market sentiment factors, sector allocation has a relatively high cost-effectiveness. The main viewpoints of CITIC SEC are as follows: Last week, the overall stability rebounded in the banking sector. In this issue of the investment outlook for the banking industry, the focus is on the recent attention of the market to the value-added tax situation of the financial industry and the sector's position and space. Value-added tax in the banking industry: The implementation of the "Value-added Tax Law of the People's Republic of China" has no impact on the tax rates related to the banking industry. The analysis of the four issues that the market is most concerned about is as follows: 1) How has the historical evolution of value-added tax laws and regulations been? In 2016, China fully implemented the pilot scheme of replacing business tax with value-added tax, aiming to standardize the financial and taxation governance system, clarify the tax relationship between the manufacturing industry and the service industry, and reduce the tax burden on related enterprises. At that time, the State Council revised the "Interim Regulations of the People's Republic of China on Value-Added Tax" twice, specifying the relevant tax requirements. In 2024, the 13th meeting of the 14th National People's Congress Standing Committee passed the "Value-Added Tax Law of the People's Republic of China", marking the transformation of the value-added tax system from administrative regulations to national law. In addition, the Value-Added Tax Law stipulates that it will be implemented starting from January 1, 2026, and the aforementioned interim regulations will be abolished at the same time. 2) What is the current value-added tax policy in the banking industry? After the implementation of the pilot scheme, commercial banks calculate the output tax based on the applicable tax rates specified in the tax law, and deduct the input tax deduction allowed for the current period. The difference should be paid as value-added tax. In the banking industry, general financial services are subject to a 6% value-added tax rate, including certain specific businesses including agricultural loans at a 3% value-added tax rate. According to the "Value-Added Tax Law of the People's Republic of China" passed in 2024 and the "Implementation Regulations of the People's Republic of China on Value-Added Tax Law" announced in 2025, the applicable tax rates in the banking industry have remained highly consistent, and the nominal tax rates have not been adjusted. 3) How high is the composite tax rate of value-added tax in the banking industry currently? Since value-added tax is a "price surcharge tax" that is not directly reflected in the profit and loss account of the taxpayer, the composite tax rate of value-added tax in banks cannot be directly calculated based on the profit and loss account. However, since the education surcharge paid by banks is levied at 3%-5% of the payable value-added tax, one can reverse-calculate the proportion of value-added tax to operating income based on this. The bank has compiled the education surcharge situation for 10 A-share listed national banks, and according to the calculation based on a 5% levy, the proportion of value-added tax to operating income in the aforementioned banks in 2024 was 5.88%. 4) Is there a possibility of adjusting the value-added tax policy in the banking industry? Firstly, the "Value-added Tax Law of the People's Republic of China" that will be implemented on January 1, 2026, does not make any adjustments to the relevant tax rates in the banking industry. Secondly, as the financial industry is an important component of modern service industry, it is highly likely that the 6% standard tax rate will continue to be applicable in the short term, and the possibility of legislative revisions or adjustments to business classifications is low. Finally, considering the uniqueness of the banking and financial industry, from the perspective of preventing financial risks and ensuring the stability of the financial system, the bank predicts that any adjustments to the applicable value-added tax rate for the banking industry in the short to medium term will be very cautious. Sector analysis: Currently in a good value allocation range. 1) Fundamentals are stable and improving. As of February 6, 11 small and medium-sized banks have disclosed their 2025 performance reports. Compared to the situation in the previous three quarters, 8 banks have seen an improvement in revenue, 6 banks have seen an improvement in net profit attributable to shareholders, 7 banks have seen an improvement in provision coverage, and 6 banks have seen an improvement in non-performing loans. Looking ahead to 2026, the bank predicts that the revenue and net profit growth of listed banks are expected to improve to 3.3% and 2.8%, respectively. 2) The peak of fund outflow is over. In January, passive funds flowed out significantly, with the bank estimating that the net outflow of ETFs linked to 11 banks was 910.2 billion yuan, affecting a net outflow of funds in bank stocks of approximately 105.1 billion yuan; the net outflow of related ETF funds last week was only 22.5 billion yuan. As of February 6, the weighted market-to-book ratio of banks (CITIC) is 0.67x PB (LF), at the 44th percentile level over the past 5 years, with an average dividend yield of 4.62% for the industry. The adjustment in stock prices due to fund flows since the beginning of the year has positioned the sector in a good value allocation range. Risk factors: Unexpected deterioration in bank asset quality; unexpected changes in regulation and industry policies; companies' strategic progress falling short of expectations.