Guotai Haitong: It is expected that the narrowing of the bank interest rate spread in the first quarter will significantly converge. The focus of sector investment is to grasp three main themes.

Guotai Haitong released a research report, stating that it is expected that the revenue and net profit growth rates of sampled banks in the first quarter of 2026 (26Q1) will be 2.7% and 2.2% respectively. Revenue growth is expected to show an upward trend, while profit growth is expected to remain stable. This is mainly due to the significant convergence of the decline in net interest margin compared to the previous year and the alleviation of pressure from other non-interest factors. The bank points out three main investment themes for the banking sector in 2026: 1) focusing on targets with potential for performance improvement or maintaining high growth rates; 2) emphasizing banks with convertible bond conversion expectations; and 3) the dividend strategy is expected to continue. The research report summary is as follows: Size: It is expected that the growth rates of interest-bearing assets and loans in 26Q1 will be 7.77% and 7.62%, respectively. According to the credit balance sheet data, in February 2026, bank financial institutions' loan and bond investment growth rates were 6.5% and 14.1% respectively, decreased by 0.4% and increased by 0.4% from the end of December 2025. The allocation towards bonds has increased. In January and February of 2026, new RMB loans increased by 5.61 trillion yuan, a decrease of 0.53 trillion yuan compared to the previous year. Among them, enterprise loans increased by 0.65 trillion yuan, mainly benefiting from the leverage effect of new policy instruments in Q4 of 2025 and improvement in economic activity. However, household loans decreased by 0.2 trillion yuan, further deleveraging. Looking at data from various regions, the credit growth rates in economically important provinces remain at a leading level, with provinces such as Sichuan and Jiangsu having credit growth rates around 10% in January. Interest margin: It is expected that the interest margin in 26Q1 will be 1.37%, a decrease of 3bp compared to the previous year (a decrease of 9bp in Q1 of 2025). The decline in the net interest margin year-on-year is expected to significantly converge, with interest net income growth in 26Q1 expected to be 2.6%. Due to the repricing of high-cost long-term deposits, unchanged LPR during the period, stable new loan rates (approximately 3.1% for enterprise and mortgage loans in February 2026 according to the Financial Times), and the expected further upgrade of interbank deposit rate self-regulation, the pressure on banks' net interest margin will be significantly reduced. Some small and medium-sized banks with outstanding improvement in deposit quality may reach bottom stabilization in a situation of high growth, showing good performance. Fee income: It is expected that the growth rate in 26Q1 will be 5.5%. In the context of low interest rates, dividend insurance products with a combination of "guaranteed income + floating dividends" are attractive, and efforts in the bancassurance channel are expected to drive fee income growth. In recent years, banks have reduced sales-based income and focused more on maintaining scale growth. In the second half of 2025, non-money market fund holdings of banks increased by 10.9% to 4.9 trillion yuan. Wealth management income is also expected to grow well in 2026. Other non-interest factors: It is expected that the growth rate in 26Q1 will be -0.8%. In the first quarter, bond market rates first fell and then rose, with the 10-year government bond yield slightly down by 2bp compared to the beginning of the year. The ChinaBond Composite Index closing price remained stable compared to the beginning of the year, combined with the low base of the same period last year (10-year government bond yield increased by 14bp in Q1 of 2025), it is expected that the valuation changes of bonds in the first quarter will have a reduced negative impact. Asset quality: It is expected that the credit cost in 26Q1 will be 0.73%, a slight decrease of 3bp year-on-year, supporting stable profit growth. The scale of loan write-offs in the first two months of 2026 was 73.4 billion yuan, an increase of 20.5 billion yuan compared to the previous year. The non-performing loan ratio is expected to decrease by 1bp to 1.20% on a quarterly basis, with the provision coverage ratio decreasing slightly by 2% to 237.1%. Risks in key areas for corporate loans continue to be resolved, legacy issues are being cleared, and retail risks have passed their peak exposure but still require trend improvement. The transition period for the new financial asset risk classification rules of 2025 has ended, and the provisions made by listed banks have become more solid. Investment recommendation: The main investment focus for the banking sector in 2026 is to grasp the following three main themes: 1) look for targets with potential for performance improvement or maintaining high growth rates; 2) emphasize banks with convertible bond conversion expectations; and 3) the dividend strategy is expected to continue. Risk warning: Credit demand weaker than expected; structural risks exposed more than anticipated.