1. Report Industry Investment Rating - No industry investment rating information is provided in the report. 2. Core Viewpoints of the Report - The correlation between the fundamental and capital aspects and long - term bonds has weakened this year. The correlation between commercial bonds, exchange - rate bonds has weakened, while the correlation between stocks and bonds has significantly increased. This is due to the decline in the risk - return ratio of bonds, leading institutions to rebalance their stock - bond portfolios. The behavior of institutions has an increasingly large impact on the bond market. Next year, banks still face significant pressure to realize floating profits, and insurance companies will continue to rebalance their stock - bond portfolios supported by premium growth [1][9]. - The bond market is expected to remain volatile. It is recommended to adopt a barbell strategy, appropriately control the duration level in trading, seize trading opportunities from oversold rebounds, and pay attention to reverse operations [2][15]. 3. Summary by Relevant Catalogs 3.1 Review Summary and Bond Market Outlook - This week, the equity market showed resilience, and news of the fund fee - rate new regulations disturbed the bond market, causing it to fluctuate weakly. The yields of 10Y and 30Y treasury bonds both increased by 2bp. The market situation varied from day to day, with factors such as the restart of treasury bond trading, Sino - US meetings, equity market performance, and fund fee - rate news affecting the bond market [8]. 3.2 Bond Market Review 3.2.1 Capital Situation - The central bank conducted a net withdrawal of funds, and the capital situation was generally balanced. From November 3rd to November 7th, the central bank's open - market operations had a net withdrawal of 157.22 billion yuan. R007 and DR007 decreased by 2bp and 4bp respectively compared to October 31st. The 3M certificate of deposit (CD) issuance rate first decreased, then increased, and finally decreased again. The FR007 - 1Y swap rate fluctuated upwards [17][18]. 3.2.2 Secondary Market Trends - Yields fluctuated upwards this week. The yields of key - term treasury bonds all increased, and most of the key - term treasury bond spreads narrowed. As of November 7th, the yields of 10Y and 30Y treasury bonds increased by 2bp compared to October 31st, reaching 1.81% and 2.16% respectively, and their spread narrowed by 0.4bp to 34bp [27]. 3.2.3 Bond Market Sentiment - The 30Y treasury bond weekly turnover rate slightly decreased, the 30Y - 10Y treasury bond spread narrowed, the inter - bank leverage ratio slightly increased to 107.2%, the exchange leverage ratio increased to 122.8%, the median duration of medium - and long - term pure bond funds slightly decreased, and the implied tax rate of 10 - year China Development Bank bonds first narrowed and then widened [35]. 3.2.4 Bond Supply - The net financing of interest - rate bonds slightly decreased this week. From November 3rd to November 7th, the net financing of interest - rate bonds was 318.8 billion yuan, a slight decrease of 5.4 billion yuan compared to last week. The net financing of treasury bonds increased, while that of local government bonds and policy - based financial bonds decreased. Next week, the issuance scale of local government bonds will increase, and new 10Y treasury bonds will be issued, and 30Y treasury bonds will be re - issued. The net financing of inter - bank certificates of deposit slightly decreased, and the average issuance rate decreased to 1.63% [50][55][56]. 3.3 Economic Data - In October, the year - on - year export turned negative. Since November, automobile consumption and port throughput have strengthened, while real - estate transactions remain weak. In terms of high - frequency economic data, real - estate transactions show mixed trends, consumption in the automobile sector has improved, movie consumption has marginally improved but is still weaker than the seasonal average, export - related port throughput has improved, and industrial production improvement has slowed down [62]. 3.4 Overseas Bond Market - The direction of the Fed's interest - rate cut in December is unclear. The US non - farm payrolls data was not released on time due to the government shutdown. Fed officials have increasing differences on whether to continue cutting interest rates in December. US bonds rose, while the bond markets in the UK and Germany fell [70][71][72]. 3.5 Performance of Major Asset Classes - The CSI Convertible Bond Index and the Nanhua Crude Oil Index increased, while the Nanhua Rebar Index weakened, and both Shanghai copper and Shanghai gold adjusted. This week, the performance of major asset classes was: convertible bonds > crude oil > CSI 300 > CSI 1000 > live pigs > Chinese - funded US dollar bonds > China bonds > US dollar > Shanghai gold > Shanghai copper > rebar [78]. 3.6 Policy Review - Multiple policies were released this week, including the "China's Actions for Carbon Peak and Carbon Neutrality" white paper, the "Report on the Implementation of China's Fiscal Policy in the First Half of 2025", the revised "Administrative Measures for the Securities Settlement Risk Fund", the "Analysis Report on Inclusive Finance Indicators (2024 - 2025)", etc. Attention should be paid to the implementation of these policies in related fields [81][83][85]

1. Report's Industry Investment Rating No information about the industry investment rating is provided in the report. 2. Core Viewpoints of the Report - The report analyzes the self - investment performance of banks in 2025 based on the semi - annual report and forecasts their behavior in the fourth quarter. It concludes that bond allocation is expected to support bank expansion, and although there is still room for banks to realize floating profits, the impact on the bond market is expected to be relatively mild [4][11][12]. 3. Summary According to the Directory 3.1 From the 2025 Semi - annual Report: Bank Self - investment Performance 3.1.1 Financial Market Returns: Increased Contribution of Realized Floating Profits - The revenue contribution of banks' self - investment business fluctuates upward. Since 2023, the proportion of investment income and fair - value changes in revenue has increased. In the first half of 2025, banks sold old bonds to realize floating profits to cope with the rising bond - market yields [20][23][26]. 3.1.2 Asset Allocation: Financial Investment Drives Balance - sheet Expansion - Since 2024, the year - on - year growth rate of bank financial investment has been rising, and its proportion in total assets has also increased. By the end of June 2025, the year - on - year growth rate of listed banks' financial investment was 14.9%. The OCI account's proportion has been increasing, and large state - owned banks have continuously increased their allocation of government bonds [31]. - In terms of duration, the overall duration of bank financial investment has been extended, but the space for continuous extension may be limited. Structurally, state - owned banks' AC accounts maintain a high duration, and joint - stock banks' OCI accounts have a more obvious duration - extension action [57][59][74]. 3.1.3 Liability Side: Decreased Liability Cost Rate and Declined Inter - bank Certificate of Deposit Balance in Q3 - In the first half of 2025, the weighted average interest - bearing liability cost rate of banks decreased by about 29BP compared with 2024, mainly due to the concentrated maturity and repricing of deposits. The deposit cost rate decreased by 25BP [86]. - Since the second quarter, the central bank's liquidity injection has been abundant, and the balance of inter - bank certificates of deposit has declined. Large state - owned banks have reduced their reliance on inter - bank certificates of deposit, while small and medium - sized banks have shortened the issuance term of inter - bank certificates of deposit to control costs [101][103][115]. 3.2 Outlook for Banks' Behavior in Q4 2025 3.2.1 Asset Side: Bond Allocation Expected to Continue Supporting Balance - sheet Expansion - In the fourth quarter, credit growth is expected to remain weak, and financial investment will still be the main driving force for bank balance - sheet expansion. The decline in liability cost rate has opened up space for bank bond allocation, and the current high spread between 10 - year treasury bonds and 1 - year inter - bank certificates of deposit has increased banks' willingness to allocate bonds [118][121][122]. - Large state - owned banks' pressure to undertake government bond issuance is expected to weaken, and small and medium - sized banks will continue to tilt available funds towards bond investment [128][131]. 3.2.2 Liability Side: Focus on the Issuance Scale of Banks' Inter - bank Certificates of Deposit - Banks may face "deposit migration" pressure in the fourth quarter, and some deposits will mature. Banks may issue inter - bank certificates of deposit preventively when liquidity is relatively loose. The issuance term of large state - owned banks is expected to be longer, while that of small and medium - sized banks is expected to be medium - short [136][138]. 3.2.3 Realizing Floating Profits: Still Some Space, but Limited Impact on the Bond Market - Banks need to smooth their performance in the fourth quarter, and there is still pressure to sell old bonds, but the impact on the bond market is expected to be relatively mild. There are limitations in selling old bonds, including accounting classification rationality, reinvestment pressure, and performance base pressure for 2026 [142][143]. - There is still some demand for banks to realize floating profits in Q4 2025, but the amount of floating profits that can be realized is limited. AC accounts have some selling constraints, and excessive realization of floating profits in OCI accounts may increase the performance base pressure for 2026 [144][151].

Investment Rating - The report maintains a "Positive" investment rating for the banking sector as of October 23, 2025 [6]. Core Insights - The external environment's uncertainty has increased, leading to a temporary decline in market risk appetite. However, the report is optimistic about the relative performance of the banking sector in Q4 2025 [3]. - The report identifies two main investment themes: the ongoing demand for financial investments and the motivation behind realizing unrealized gains in bank assets [4][9]. Summary by Sections 1. Investment Assets Driving Bank Expansion - Financial investment growth has accelerated to 15%, with significant performance differentiation across sectors. In H1 2025, financial investments were the core driver of asset expansion, with a year-on-year growth of 14.9% [14]. - The structure of financial investments shows that interest-bearing bonds continue to dominate, with their proportion increasing to 60.2% by mid-2025. The growth rates for state-owned banks and city commercial banks were 8% and 11%, respectively [16]. 2. Changes in How Banks Smooth Earnings Volatility - Banks are increasingly shifting from using the income statement to the balance sheet to smooth earnings volatility. The report highlights that the contribution of investment income, particularly from the amortized cost (AC) assets, has been rising significantly [9][10]. - The unrealized gains in the Other Comprehensive Income (OCI) account were estimated at CNY 438.4 billion, representing 7.8% of annual revenue as of H1 2025 [9]. 3. Motivation for Realizing Unrealized Gains - Smaller banks exhibit a stronger motivation to realize unrealized gains compared to larger banks, which need to balance performance and interest rate risk management (IRRBB) assessments [9]. - The report anticipates continued demand for realizing unrealized gains in Q3 2025, although the intensity may weaken compared to mid-year [9][10]. 4. Investment Recommendations - The report recommends focusing on fundamentally strong small and medium-sized banks, such as Chongqing Rural Commercial Bank (601077, Buy) and Nanjing Bank (601009, Buy) [9]. - For state-owned banks with solid fundamentals and defensive value, the report mentions Industrial and Commercial Bank of China (601398, Not Rated) and Agricultural Bank of China (601288, Not Rated) as potential investment targets [9].