According to a recent research report, the banking sector is entering a critical period for validating its fundamentals as the 2025 annual reports and 2026 first-quarter reports are intensively disclosed. The fundamental inflection point is largely confirmed, with the shift in expectations creating opportunities for valuation recovery in individual stocks. The logic behind deposit migration, the recovery of wealth management and distribution businesses, and the expansion of fee-based income has received preliminary validation. Most banks have seen good growth in income from distributing wealth management and insurance products, driving a continuous recovery in fee-based income.
The report suggests focusing on: (1) high-dividend, stable-payout stocks, as the logic of dividends and defense remains unchanged; and (2) high-quality regional banks with strong profit growth certainty and expanding alpha potential as structural transformation deepens. The main views of the report are outlined below.
Sector Review and Current Dynamics
Since the beginning of the year, the banking index has fallen by 5.68%. The sector's performance has been influenced by multiple factors including shifts in market style, capital flow disturbances, geopolitical events, and fundamental improvements, exhibiting characteristics of a structural market. Recently, disturbances from passive funds have diminished, while the short-term impact of active funds has increased, aligning with the recent fundamentally-driven structural market trends and alpha-based stock selection logic. With the intensive disclosure of the 2025 annual and 2026 first-quarter reports, the banking sector has entered a crucial period for fundamental validation. The inflection point in fundamentals is largely confirmed, and the shift in expectations is creating opportunities for valuation recovery in individual stocks.
Outlook for the Next Phase
Compared to expectations of a comprehensive recovery in volume, price, and risk, the report believes the banking sector's fundamentals will continue the positive trend seen in the first quarter. Improvement and divergence in both volume and pricing will coexist, becoming a main feature of the sector's operational transformation phase for a certain period. However, attention must still be paid to local risks at the asset quality level.
Volume and Pricing
(1) Weak credit demand is expected to persist, with policy support and structural optimization continuing to contribute incremental growth. It is estimated that the full-year new credit scale could reach 14.96 to 16.04 trillion yuan, with growth slowing. However, fiscal policy efforts are creating incremental space for bank credit deployment, while ongoing structural optimization brings credit increments to key sectors. There is a possibility of a weak recovery in retail credit, but a trend reversal is unlikely.
(2) Clear signals of stabilization and improvement in pricing on both sides of the balance sheet indicate that net interest margins (NIM) are highly likely to have bottomed out. Although conditions are not ripe for a pro-cyclical recovery, the bottom is essentially established, with even some room for a slight rebound. It is estimated that the full-year change in NIM will range from -0.1 basis points to 1.92 basis points.
Risk and Asset Quality
Asset quality has entered the latter stage of risk clearance, but structural divergence continues. The impact from real estate and local government financing vehicles remains within a controllable range, and the likelihood of subsequent risk events erupting significantly is small. Nevertheless, local risks still require monitoring. Furthermore, non-performing risks in retail areas such as mortgages, credit cards, consumer loans, and business loans are still rising. Although the possibility of concentrated exposure or significant losses is low, factors such as household income expectations and collateral price volatility do not yet provide the conditions to support a substantive reversal in retail risks.
Medium to Long-Term Perspective
Amid the trend of deposit migration, banks face opportunities for expanding their fee-based businesses through wealth management distribution, coupled with benefits from a recovering capital market favoring distribution. Rising household investment demand is also opening a window for asset allocation. It is estimated that approximately 3.41 trillion yuan of maturing time deposits from listed banks will migrate in 2026, with about 1.34 trillion yuan allocated for investment. Recent financial report data provides preliminary validation for the logic of deposit migration, the recovery of wealth management and distribution businesses, and fee-based income expansion. Most banks have seen good growth in income from distributing wealth management and insurance products, driving a continuous recovery in fee-based income.
Risk Warnings
Risks include: asset quality deterioration due to economic growth falling short of expectations; pressure on NIM from the diminishing impact of deposit repricing upon maturity; and pressure on investment income from financial market business operations.
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