A research report has been released, stating that from a fundamental perspective, stabilized net interest margins and positive non-interest income may keep bank revenue growth at a favorable level in the second half of the year. Benefiting from the forward-looking provision for impairment losses made in the first quarter, the profit growth rate of the sector in subsequent quarters is expected to show a sequential upward trend throughout the year.
Looking ahead to 2026-2027, the banking sector is entering the tail end of its risk cycle, with the first derivative of ROE already showing improvement. It is projected that the industry's absolute ROE will stabilize within the 8%-9% range this year and next, aiding in the valuation uplift of the sector. Currently, some large-cap stocks offer static dividend yields above 5%, with static price-to-book ratios between 0.5x and 0.60x. In the second half of the year, these stocks are expected to undergo a revaluation from being perceived as "high-dividend defensive assets" to "high-certainty equity assets." The main viewpoints are as follows:
Asset Allocation: Structure is Paramount
1) Credit: Focus on structure over total volume. It is estimated that the incremental credit in RMB terms for 2026 will be around 14.6 trillion yuan (compared to 16.3 trillion yuan in the previous year), corresponding to a slight decline in the year-end growth rate of total social financing balance to around 7.4%. The structural focal points for credit will remain in key economic provinces and major engineering projects. The slowdown in credit growth is a result of economic structural adjustments and the evolution of the financial structure, influenced by new economic development, corporate overseas expansion, and debt replacement.
2) Investment: Base effects and unrealized gains reserves are the core variables. From a scale perspective, as bond financing in the broader economy increases, banks' absorption and allocation of various bonds remain an important direction. From a profit and loss perspective, reserves of unrealized gains and the base for realization have become the decisive factors for the performance of other non-interest income at individual banks. Considering these factors overall, it is anticipated that listed banks' investment business strategies will be prudent in 2026, with the growth rate of other non-interest income declining to the range of (-5%, 0).
Liability Management: Cost Reduction as the Guiding Principle
1) Cost reduction and efficiency improvement remain the main theme of liability management. Factors such as foreign exchange settlement have driven sustained positive broad liquidity, while narrow liquidity also remains neutral to loose. This provides a time window for commercial banks to optimize their liability structure both currently and in the next phase.
2) Continuation of deposit maturity and structural transformation. The RMB exchange rate remains in a stage of sustained appreciation expectations, while active capital markets continue to promote the shift of deposits to non-bank financial institutions. It is expected that corporate and non-bank deposits will improve within the year, while the growth rate of individual deposits will continue to decline.
3) Focus on optimizing liability types and term structure. In terms of type structure, the increase in interbank deposits and the active reduction in the use of interbank certificates of deposit are expected to continue lowering the cost of interbank liabilities. Regarding term structure, short-term time deposits are replacing maturing medium- to long-term time deposits, indicating that the decline in deposit costs is entering its latter stage.
Net Interest Margin Outlook: Bottoming Out and Stabilizing
1) Interest Rate Policy: Limited room for reduction within the year. Reviewing the relationship between PPI and OMO rate cuts since 2013, 15 out of 17 rate cuts occurred during periods of negative year-on-year PPI growth. With inflation expectations rising, the likelihood of policy rate reductions, and consequently deposit and loan rate cuts, within the year is low.
2) Deposit Costs: The core variable for stabilizing net interest margins. It is judged that the market is still in the middle to later stages of the maturity cycle of medium- to long-term high-interest deposits. Considering the spread between existing and new deposit rates and the ongoing shortening of deposit term structures, the annual decline in the deposit interest payment rate may still be 15-20 basis points.
3) Loan Rates: Yields gradually entering a stable period. The reduced room for LPR rate cuts, coupled with the stabilization of the excessive decline in terminal rates, are key conditions for loan yields entering a stable period. Based on trends in newly issued loan rates and the level of existing loan yields, it is estimated that the year-on-year decline in loan yields for 2026 may narrow to around 15 basis points.
4) Net Interest Margin Outlook: The annual decline in net interest margin may narrow to 1-2 basis points. Under the neutral scenario where quarterly policy rates and LPR rates are not adjusted within the year, it is projected that the net interest margin for listed banks in 2026 will decline by 1-2 basis points.
Asset Quality: Consolidating the Foundation
1) Book Quality: Corporate loan quality is generally stable and improving, while retail loan quality continues to face pressure. While the overall non-performing loan ratio for the industry is stable and improving, the quality of corporate and retail loans continues to diverge.
2) Forward Look at Key Risk Areas: Non-performing loan formation remains stable. In 2026, retail credit remains a key area of risk focus. With forward-looking indicators (such as the "current employment sentiment index" and second-hand housing price index) recovering from their lows, coupled with banks strengthening risk controls, retail risks in the industry are expected to move out of the risk cycle.
3) Credit Cost Outlook: Strengthening provision bases, marginal recovery in broad credit costs. Considering that industry revenue growth is expected to remain at a favorable level within the year, providing a solid financial foundation for banks to strengthen their provision bases, the industry's broad credit costs for the full year are expected to maintain a marginal recovery trend. It is projected that the increase in asset impairment losses for 2026 will be in the range of 13%-15% (compared to only 0.9% in 2025).
Earnings Outlook: Gradual Improvement
1) Sector profit growth is expected to improve quarter by quarter. On the revenue side, after the low-base effect of other non-interest income in the first quarter fades, revenue growth in subsequent quarters may experience a slight decline. On the profit side, benefiting from the forward-looking provision for impairment losses in the first quarter, profit growth within the year may show a sequential upward trend. It is estimated that the net profit attributable to parent company owners of listed banks will grow by around 4.5% in 2026.
2) The trend of individual bank improvement and divergence is likely to continue. Analysis suggests that business structure, provision bases, and base effects are the core variables driving the divergence in the financial performance of listed banks this year. It is expected that on the basis of overall sector profit improvement, the profit growth of large banks is likely to maintain a continuous improvement trend. Joint-stock banks will see profit improvement but a slower recovery on the revenue side, while performance divergence among city and rural commercial banks may continue, with regional factors and non-interest income performance being the key determinants.
Risk Factors
A significant slowdown in macroeconomic growth; worse-than-expected deterioration in bank asset quality; adverse changes in regulatory and industry policies; substantial adverse changes in the interest rate environment; slower-than-expected progress in company strategies.
Investment Strategy: High-Certainty Equity Assets, Revaluation Underway
The current average static dividend yield for A-share banks is approximately 4.3%, with some large-cap stocks offering yields above 5%, and the average static price-to-book ratio is 0.60x. Looking ahead to 2026-2027, the banking sector is entering the tail end of its risk cycle, with the first derivative of ROE already showing improvement. It is projected that the industry's absolute ROE will stabilize within the 8%-9% range this year and next, aiding in the valuation uplift of the sector. Currently, some large-cap stocks offer static dividend yields above 5%, with static price-to-book ratios between 0.5x and 0.60x. In the second half of the year, these stocks are expected to undergo a revaluation from being perceived as "high-dividend defensive assets" to "high-certainty equity assets." Following significant capital outflows, the potential for absolute returns is substantial.
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