China Galaxy Securities released a research report stating that the first-quarter 2026 monetary policy meeting maintained a prudent stance. While continuing a loose overall liquidity environment, it more precisely guides financial resources toward key sectors. Through optimization of interest rate mechanisms and benefits from lower liability costs, the policy provides a buffer for bank interest margins. Combined with a focus on strengthening bank capital strength, these factors create favorable conditions supporting continued improvement in the banking sector's fundamental operations and the manifestation of valuation resilience. In an environment of low interest rates and accelerated entry of medium- to long-term funds into the market, the banking sector's attributes of high dividends and low valuations remain continuously attractive to long-term funds such as insurance capital, accelerating the repricing of valuations. The firm maintains a positive outlook on the dividend value of the banking sector and continues its "Recommended" rating.
The monetary policy meeting's direction is largely consistent with the fourth-quarter guidance. While the central bank's attention to the external environment has increased, policy remains moderately loose, reflecting a domestically-focused policy orientation to better support the expansion of domestic demand. Short-term impact from imported inflation is expected to be limited, aligning with the firm's previous report assessments. Based on this, banks are expected to maintain trends of steady credit growth, structural optimization, and improving interest margins, with sound fundamentals supporting valuation recovery. As of April 2nd, the banking sector has recorded gains over multiple trading sessions, accumulating a 4.55% increase compared to the low point of the previous Monday's pullback. The sector's valuation has surpassed its level before the March adjustment, reflecting, to some extent, valuation resilience underpinned by improving fundamentals and rising demand for safe-haven assets.
Monetary policy at the current stage has an overall positive impact on banks. The continuation of a moderately loose monetary policy creates a stable monetary environment for bank credit growth and structural optimization. The meeting reiterated the commitment to maintaining ample liquidity, ensuring that growth in total social financing and money supply aligns with expected targets for economic growth and the general price level. In the first quarter of this year, the central bank's Medium-term Lending Facility (MLF) operations totaled 2 trillion yuan, exceeding the amounts for the same period in recent years. Additionally, a net 600 billion yuan was injected via outright reverse repos, fully meeting financial institutions' liquidity needs and sustaining support for the real economy. Furthermore, the meeting emphasized utilizing various structural monetary policy tools effectively and added a new emphasis on "optimizing tool management." Earlier this year, the central bank cut interest rates on structural monetary policy tools by 25 basis points. It is anticipated that structural tools will continue to be crucial for precisely supporting the real economy, guiding banks to allocate more credit resources towards key areas such as the "Five Major Articles," domestic demand expansion, technological innovation, and small and micro-enterprises, thereby accelerating the optimization of credit structure.
The trend of improving interest margins remains intact, and the impact of interest rate risks is manageable. The meeting continued to stress strengthening the guiding role of policy rates and improving market-based interest rate transmission. It newly emphasized standardizing credit market practices, reducing intermediate financing costs, and promoting low overall social financing costs. The central bank's maintenance of pricing order and continued supportive stance towards bank interest margins helps alleviate pressure from declining yields on the asset side. Meanwhile, optimization of liability costs remains a core variable supporting interest margin improvement. Additionally, the meeting reiterated attention to changes in long-term bond yields, monitoring financial market risks from a macroprudential perspective. Since October 2025, the central bank resumed open market operations involving government bond buying and selling, leveraging the government bond yield curve's role as a pricing benchmark. Net injections have totaled 150 billion yuan year-to-date, with the 10-year government bond rate stabilizing around 1.8%-1.9%. Coupled with strengthened duration control by banks and the fact that bond investments are still predominantly held for investment purposes, the impact of rising interest rates and imported inflation on banks' financial market operations is expected to be generally manageable.
Attention is directed towards bank capital replenishment to enhance their capacity to serve the real economy and withstand systemic risks. The meeting continued to propose strengthening bank capital strength. Although banks' internal capital generation capacity has seen marginal improvement, they still face demands to support key real economy sectors, prevent and resolve risks, and maintain stable dividends, implying persistent capital pressures. This year's National People's Congress proposed issuing 300 billion yuan in special government bonds to replenish the capital of major state-owned banks and to intensify capital replenishment through multiple channels. Subsequently, the possibility of using various methods, such as local government special bonds, to augment capital for small and medium-sized banks cannot be ruled out.
Investment recommendation: Individual stock recommendations include Industrial and Commercial Bank of China, Agricultural Bank of China, Postal Savings Bank of China, China Merchants Bank, Bank of Ningbo, and Bank of Changshu. Risk提示: Risks include economic performance falling short of expectations, deterioration in asset quality; declining interest rates putting pressure on Net Interest Margin (NIM); tariff impacts, and weakening demand.
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