Shenwan Hongyuan Group Co., Ltd. released a research report stating that credit growth in the banking sector slowed as anticipated in the first quarter of 2026, with expectations for a steady deceleration throughout the year. However, divergence among banks is set to become more pronounced. During the first-quarter earnings season, the report highlights that certain banks, particularly high-quality city commercial banks, are highly likely to report revenue exceeding expectations, which may drive an early valuation recovery. The firm maintains a positive outlook on the banking sector, reiterating the preference for alpha over beta.

Amid increasing external uncertainties, the stability of bank fundamentals and the advantage of high dividend yields (reaching 4.7%) underscore the attractiveness of bank stocks for allocation. Medium- to long-term funds, such as those from insurance companies, remain key drivers for sector valuation recovery. On this basis, Shenwan Hongyuan continues to emphasize the view of "selecting alpha over beta in bank stocks for 2026," focusing on banks with stronger revenue-driven earnings growth. The main points of the report are as follows:

According to data disclosed by the People's Bank of China, aggregate social financing (ASF) increased by RMB 14.8 trillion in the first quarter of 2026, down RMB 353.8 billion year-on-year. In March alone, new ASF totaled RMB 5.2 trillion, a decrease of RMB 670.1 billion compared to the same period last year. Outstanding ASF grew by 7.9% year-on-year, with the growth rate declining by 0.3 percentage points from the previous month. M1 money supply increased by 5.1% year-on-year, down 0.8 percentage points month-on-month, while M2 grew by 8.5% year-on-year, declining by 0.5 percentage points from the previous month.

Credit growth in the first quarter was subdued, slowing as expected. New credit issuance decreased by approximately RMB 1.2 trillion year-on-year, partly due to banks actively reducing bill discounts and continued weakness in retail demand. Under the financial data caliber, new credit in the first quarter of 2026 amounted to RMB 8.6 trillion, down RMB 1.2 trillion year-on-year. Bill discounts saw a net decrease of RMB 1.1 trillion, a year-on-year drop of over RMB 550 billion, while retail loans increased by only about RMB 297 billion, down more than RMB 740 billion year-on-year. On a marginal basis, new credit in March was approximately RMB 3 trillion, a decrease of RMB 650 billion year-on-year. The growth rate of outstanding RMB loans fell by 0.3 percentage points to 5.8% compared to the previous month.

Looking ahead to the full year, credit growth is expected to slow steadily. Assuming new credit remains flat with 2025 or decreases by RMB 1 trillion year-on-year, loan growth rates for 2026 would be 6.0% and 5.6%, respectively. Divergence is expected to reemerge, with banks in high-quality regions such as Jiangsu, Zhejiang, and Chongqing likely to continue outperforming the sector. The report particularly highlights the potential for these banks to exceed revenue expectations in the first quarter.

Corporate credit growth remained stable, underpinning the fundamental performance. In the first quarter of 2026, general corporate loans (including short-term and medium- to long-term corporate loans) increased by RMB 9.55 trillion, up RMB 460 billion year-on-year. Medium- to long-term corporate loans rose by RMB 5.4 trillion, largely flat compared to the previous year, while March saw an increase of RMB 1.35 trillion, down RMB 230 billion year-on-year. Short-term corporate loans grew by RMB 4.13 trillion in the first quarter, up RMB 620 billion year-on-year, with a March increase of RMB 1.48 trillion, up RMB 40 billion year-on-year. With fiscal policy front-loaded in the first year of the 15th Five-Year Plan, medium- to long-term corporate lending is expected to continue supporting credit growth. The pace of credit extension in 2026 is likely to be more balanced compared to the notably front-loaded节奏 of the previous year.

Retail demand remains subdued. Household credit increased by less than RMB 300 billion in the first quarter of 2026, down more than RMB 740 billion year-on-year. In March, new household credit amounted to RMB 490.9 billion, a decrease of RMB 494.4 billion year-on-year. Structurally, medium- to long-term household loans rose by only about RMB 460 billion in the first quarter, down RMB 422.5 billion year-on-year (with a March decrease of approximately RMB 210 billion year-on-year). While prices of second-hand homes in some key cities have stabilized month-on-month, a broader recovery in demand will take time. Short-term household loans saw a net decrease of about RMB 164 billion, down more than RMB 320 billion year-on-year (with a March decrease of roughly RMB 288.5 billion year-on-year). A turning point in retail credit will depend on future developments in income and housing price expectations.

A high base led to slower growth in government bond issuance, dragging down ASF growth. In the first quarter of 2026, new ASF totaled RMB 14.8 trillion, down RMB 353.8 billion year-on-year. March ASF increased by RMB 5.2 trillion, a decrease of RMB 670.1 billion year-on-year. Outstanding ASF grew by 7.9% year-on-year, with the growth rate falling by 0.3 percentage points month-on-month. Government bond issuance in March declined year-on-year due to a high base effect. In the first quarter, government bonds increased by RMB 3.54 trillion, down RMB 334 billion year-on-year (with a March decrease of RMB 324.4 billion, mainly due to the high base in March 2025 when new government bonds reached RMB 1.5 trillion, up over RMB 1 trillion year-on-year).

Real economy credit demand remains weak, while corporate bond issuance has increased significantly. In the first quarter of 2026, RMB loans to the real economy increased by RMB 8.9 trillion, down nearly RMB 800 billion year-on-year. Corporate bonds rose by RMB 1.05 trillion, up more than RMB 520 billion year-on-year, partially substituting for credit demand. Off-balance-sheet financing increased by RMB 527 billion, roughly flat year-on-year.

M1 and M2 growth declined in tandem, with non-bank deposits decreasing less in March due to a low base. Deposits increased by RMB 4.47 trillion in the first quarter, up RMB 220 billion year-on-year. Retail deposits rose by RMB 2.44 trillion, down RMB 650 billion year-on-year, while corporate deposits increased by RMB 2.72 trillion, down RMB 115.5 billion year-on-year. Non-bank deposits saw a net decrease of RMB 810 billion, but the decline was RMB 600 billion less than the previous year, mainly due to a low base caused by the regulation of interbank deposit rates in March 2025. Fiscal deposits decreased by RMB 739.4 billion, with the decline narrowing by RMB 31.6 billion year-on-year.

In terms of money supply growth, M1 increased by 5.1% year-on-year, down 0.8 percentage points month-on-month, while M2 grew by 8.5% year-on-year, declining by 0.5 percentage points from the previous month. The slowdown in M1 growth is attributed to the fading low base effect, consistent with the firm's earlier assessment. A sustained upturn will require a substantive recovery in the real economy.

Stock selection should focus on two main themes: 1) The asset expansion theme, based on the logic of EPS improvement. High-quality city commercial banks achieving asset expansion amid marginal improvements in fundamentals, such as Bank of Suzhou, Bank of Chongqing, and Bank of Ningbo. 2) The property market improvement theme, based on the logic of narrowing BPS discounts. Stabilizing property policies are expected to improve risk sentiment, with attention on joint-stock banks capable of achieving stable positive earnings growth despite lagging valuations, such as Industrial Bank, China CITIC Bank, and China Merchants Bank.

Risks include: Effectiveness of growth-stabilizing policies falling short of expectations; slower-than-expected economic recovery; disruptions from platform interest rate cuts; a slower-than-anticipated stabilization of net interest margins; and accelerated exposure of non-performing loans in weaker segments.