Investment Rating - The industry investment rating is maintained as "Positive" [4] Core Viewpoints - The impact of the restoration of VAT on bond interest income on bank profits is limited, with a focus on changes in asset allocation [2][19] - The external environment is increasingly uncertain, and a continuation of loose monetary policy is expected, leading to a long-term downward trend in overall expected returns [29] - The expected improvement in the banking sector's fundamentals in Q2 2025 compared to Q1 2025 is primarily due to alleviated pressure on other non-interest income growth [29] Summary by Sections Tax Rate Changes - The restoration of VAT on interest income from government bonds, local government bonds, and financial bonds will take effect from August 8, 2025, with a VAT rate of 6% for self-operated institutions [7][8] - Existing bonds issued before August 8, 2025, will continue to be exempt from VAT until maturity [8][9] Impact on Banking Sector - The restoration of VAT is expected to lead to a marginal decline in the adjusted yields of affected bonds by approximately 8-13 basis points [15][17] - The overall negative impact on commercial banks' net profits is estimated at about 3.6% from a stock perspective and only 0.15% from a new bond perspective [19][20] - State-owned banks are expected to be more adversely affected compared to rural commercial banks [19][23] Investment Recommendations - Focus on two main investment themes: 1. High-dividend stocks based on the reduction of insurance preset interest rates, with recommendations including China Construction Bank, Industrial and Commercial Bank of China, and China Merchants Bank [30] 2. Well-established small and medium-sized banks, with recommendations including Industrial Bank, CITIC Bank, Nanjing Bank (Buy), Jiangsu Bank (Buy), and Hangzhou Bank (Buy) [30]