Huachuang Securities: Credit deceleration, no change in resilience, capital switching to revaluation banks

The Zhitong Finance App learned that Huachuang Securities released a research report saying that the core logic of medium- to long-term capital entry and public fund reform has not changed. Emphasis is placed on banking sector allocation opportunities, and bank arrears are still large. Although AI's main line of high growth allocates some incremental capital, the bank stock investment logic is still based on “dividend defense as the base, and performance flexibility depends on high quality targets.” 1) The characteristics of high dividends and undervaluation are still the undertones of bank stocks. In particular, in the context of declining risk-free interest rates, the debt-like nature of bank stocks will continue to attract steady capital. 2) As interest spreads stabilize, regional credit demand picks up, and non-interest income grows, some high-quality banks will show strong performance flexibility, and valuations are expected to switch from PB logic to PE logic.

The bank proposes to focus on the following three main investment lines in 2026: Main Line 1: the cornerstone of national credit and dividends, represented by major state-owned banks+recruitment. Main line 2: High-quality stock banks and urban commercial banks where interest spreads may pick up first, wealth management businesses can release greater flexibility, and lower credit costs drive ROE stability. This reflects cost advantages and risk control advantages. Main line 3: Urban commercial banks that continue to benefit from regional policies and have high performance flexibility.

The main views of Huachuang Securities are as follows:

Monthly market performance: market style rebalanced, with dividend assets dominating

1) Industry rise and fall rate: In July 2026, the banking sector rose 11.6%, outperforming the Shanghai and Shenzhen 300 Index by 19.4pct. In July, the A-share market showed significant “high and low switching” characteristics. The technology growth circuit, which was heavily congested in the early stages, has recovered, while undervalued and high-dividend dividend assets have once again become a “safe haven” for capital. Looking specifically at the banking sector segment, in July 2026, the overall valuation of the banking sector experienced a significant recovery, and the PB levels of various sub-sectors fluctuated upward. The PB valuations of state-owned banks, stock banks, and urban commercial banks rose from 0.67X/0.48X/0.61X at the beginning of the month to 0.75X/0.54X/0.68X at the end of the month, respectively. Bank stocks generally rose in July, and undervalued small to medium banks were significantly more flexible than large banks. The dividend market in July was pioneered by major state-owned banks and high dividend stocks. After sector beta confirmation, capital began to spill out along the “certainty → cost performance” chain. Small and medium banks with low PB and small circulation markets became the first choice for proliferation due to more room for repair. The top three banks with increases were Bank of Suzhou (+22.0%), Qingnong Commercial Bank (+20.7%), and Bank of Nanjing (+17.6%).

2) Interest rate environment: In July 2026, interest rates on treasury bonds fluctuated in a narrow range. Short-term interest rates rose slightly at the beginning of the month due to the return of capital after the cross-season period; however, against the backdrop of weak economic recovery, scarce assets, and the central bank's continued protection of liquidity, long-term interest rates remained resilient. Disruptions in the mid-month tax period led to a phased reduction in capital, but the central bank maintained stable liquidity through tools such as buyouts and reverse repurchases, and the overall pressure on the bond market was limited. As supply pressure on government bonds eased, expectations of policy easing heated up, and safe-haven demand brought about by fluctuations in the equity market, bond yields declined somewhat, and 1-year treasury bond yields remained low and fluctuated throughout the month.

3) Industry turnover: In July 2026, transaction activity in the banking sector continued to pick up. Trading activity in the banking sector increased in July, and both turnover and share improved compared to June. As of July 31, the turnover of the banking sector decreased by 5.9% year on year and rose 17.7% month on month, accounting for 1.20% of the total turnover of the AB share market, or +24 bps month-on-month.

4) Industry valuation: The current valuation of the banking sector is historically low. As of August 5, the overall PE of the banking sector (Shenwan Bank Index, 801780.SI) was 6.05 times, the historical quantile for the past 10 years was 36.08%, PB was 0.50 times, and the historical fraction was 19.71%. The dividend rate is 4.41%, and the historical quantile is 49.61%.

The growth rate of social finance declined moderately, and “slowing down and improving the quality” of loans became the new normal

The growth rate of social finance stocks moderately fell back to 7.4% in the same month. On the one hand, this was due to real estate and platform loans entering a period of stock contraction. On the other hand, it also reflected that the asset-light nature of emerging industries reduced their dependence on credit per unit of GDP. It is worth noting that the financing structure continues to be optimized. The share of direct financing in social finance growth increased to 11.3% in the first half of the year, and the increase in corporate bond financing showed a substantial increase in the willingness of market players to finance independently. Looking at the credit structure, insufficient endogenous demand is still a core contradiction: medium- and long-term loans for residents and enterprises decreased significantly year-on-year due to weak consumer spending and insufficient motivation for enterprises to expand production; in this context, banks used bill discounts to hedge the gap by using significant increases (+525.3 billion yuan). This is not only a rational choice to meet the credit scale of regulatory agreements at the end of the quarter, but also reflects the smooth demand for credit investment under MPA assessment. On the money supply side, M1 and M2 growth rates declined to 4.0% and 8.0% respectively, indicating that capital activity still needs to be repaired. The deposit-side “disintermediation” trend has intensified. Along with the decline in broad-spectrum interest rates, residents' savings continue to migrate to off-balance sheet asset management products. The rise in non-bank deposits confirms that capital is actively seeking a higher return allocation direction. This also poses new challenges to the banking system's debt cost management.

Credit deceleration will not change banks' fundamental resilience, and the shift in funding style is driving the sector to regain attention

Social finance and credit data for the second quarter showed that entity financing demand was still weak, but bank profits remained stable, supported by a narrowing year-on-year decline in interest spreads, the restoration of wealth management services, and improvements in bond market investment returns. The bank believes that the current slowdown in credit growth is more a reflection of economic structural transformation and optimization of financing systems, rather than weakening banks' ability to operate. In the future, “slowing down and improving quality” may become the new normal for bank operations. Judging from the Chengnong Commercial Bank, which has disclosed its annual results report for 26 and a half years, profits have continued to be relatively resilient. Bank of Chongqing, Chongqing Commercial Bank, and Bank of Jiangsu disclosed 1H26 revenue growth rates of +10.80%/+7.81%/+9.11%, respectively, compared with 1q26, -0.77pct/ -0.58pct/+0.70pct, respectively; 1H26 net profit growth rates were +10.28%/+6.09%/+8.09%, respectively, compared to 1q26, -0.12pct/+1.02pct/-0.11pct, respectively. On the capital side, as trading congestion increased in the booming sector in the early period and market risk appetite declined, capital gradually switched to undervalued and high-dividend assets, and the banking sector ushered in a return of allocated capital. The essence of this round of banking market is the repricing of bank asset allocation values under market style rebalancing. In the context of low interest rates and “asset shortages,” bank stocks have both valuation advantages, dividend value, and profit resilience, and long-term allocation value is expected to increase further.

Risk warning: Increased downward pressure on the economy, exposure to risks in urban investment and real estate, and credit investment falling short of expectations.