Kaiyuan Securities released a research report indicating that credit conditions have yet to recover, suggesting a focus on banks with more predictable performance. The firm remains optimistic that listed banks will achieve a better balance between scale, pricing, and risk by 2026, with operating conditions expected to continue the improving trend seen in 2025. It recommends paying attention to city commercial banks that have ample project reserves and operate in regions with strong economic activity. Over the medium to long term, large comprehensive banks and specialized wealth management banks are expected to outperform, with CITIC BANK (00998) being among the top picks. Key views from Kaiyuan Securities are summarized below.
Money Supply: M1 growth declined, indicating a temporary slowdown in monetary activation, while M2 growth retreated from recent highs. In March, M1 growth fell to 5.1%, though it remains relatively high compared to recent years. The slowdown in deposit activation reflects not only subdued corporate activity but also a shift by households from current deposits to short-term fixed deposits or highly liquid wealth management products amid stock market volatility. M2 growth dropped to 8.5%, as fiscal spending continued to support money creation, though the high base from the same period in 2025 and slower cross-border capital inflows had a moderating effect.
Deposits: Post-holiday cash回流 boosted corporate deposits, which grew more strongly than household deposits, while non-bank financial institution deposits contracted as wealth management products moved back onto bank balance sheets. In March, RMB deposits increased by 4.47 trillion yuan, up 220 billion year-on-year. Structurally, household deposit growth was weaker than in previous years, mainly due to lower credit creation from household borrowing. Corporate deposits rose after the Lunar New Year, supported by bond issuance. Non-bank deposits fell by 810 billion yuan in the month, likely reflecting significant reintermediation of wealth management products at month-end. So far, large-scale deposit shifts have not materialized, and further moves toward non-bank deposit channels will require monitoring.
Total Social Financing (TSF): TSF growth slowed to 7.9% in March, with weak credit expansion partially offset by continued government bond issuance. TSF increased by 5.23 trillion yuan in March, bringing the year-on-year growth rate of outstanding TSF to 7.9%, down 0.3 percentage points from February. Key components include: (1) Loans: RMB loans (TSF basis) rose by 3.15 trillion yuan, down 670.8 billion year-on-year; (2) Off-balance sheet items: Undiscounted bankers' acceptances fell by 237.3 billion year-on-year, with limited discounting activity, which the report attributes to weak demand for bank guarantees, reduced bill issuance by companies, and the concentrated maturity of previously issued bills; (3) Direct financing: Government bond issuance remained above 1 trillion yuan, while corporate bond issuance increased significantly, likely due to new project demand and lower financing costs compared to loans, leading companies to prefer bond issuance.
Loans: Medium- and long-term corporate loan growth slowed, highlighting the ongoing impact of balancing volume and pricing. New RMB loans in March totaled 2.99 trillion yuan, with growth declining to 5.7%, reflecting weak credit conditions and continued strength in deposits relative to loans. The spread between deposit and loan growth rates remained wide at 2.94%, indicating that banks continue to hold excess liquidity. Reasons for the overall weakness in loan issuance include: (1) Runoff of previously reserved project loans, with medium- and long-term corporate loan growth falling to 7.55% in March after a slight rebound in February; (2) Self-imposed loan pricing discipline, with some short-term loans not being rolled over after maturity; (3) Notably weak retail credit, as households show little appetite for leverage and some banks actively reduce exposure in this segment.
Looking ahead to April, the traditional low season for lending is unlikely to significantly impact the asset-liability gap, but excessively loose liquidity conditions may tighten. Factors to watch include tax payments, government bond issuance schedules, maturing base money, and interbank self-regulation. From an asset allocation perspective, banks may see increased willingness to allocate to bonds in the second quarter, supported by lower funding costs and a scarcity of high-quality assets. However, constraints under Economic Value of Equity (EVE) metrics may limit room for duration allocation, suggesting that further compression in ultra-long bond spreads should not be overestimated.
Risks include larger-than-expected net interest margin compression, spread of retail risks leading to significantly higher credit costs, and bond investment losses due to interest rate volatility.
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