Orient Securities Company Limited has released a research report indicating that the banking sector is expected to return to a fundamental-driven narrative in 2026. The firm believes that banks are still in a concentrated repricing cycle for deposits, which should support a phased and structural stabilisation and recovery of net interest margins (NIM). Meanwhile, structural risk exposures are anticipated to be supported by policy measures, leading to expectations of a sustained improvement in the banking industry's revenue from 2026 to 2027.
Furthermore, with the significant reduction in selling pressure from bank stock stabilisation funds, a rebalancing of market risk appetite and style is expected to increase the probability of banks achieving relative returns on a phased basis. The report suggests focusing on two key investment themes: firstly, high-quality small and mid-sized banks with clear fundamental drivers, and secondly, large state-owned banks that offer sound fundamentals and strong defensive value.
Net interest margins are expected to remain stable, still serving as the core factor supporting the sector's earnings resilience.
The repricing of time deposits will further release room for improving liability costs. Combined with the implementation of self-discipline measures for interbank liabilities and declining rates on non-bank demand and time deposits, it is estimated that the cost of interest-bearing liabilities for the full year of 2026 will improve by more than 30 basis points, with over 70% of this impact likely to be realised in the first half of the year. From the perspective of new loan yields, the pace of stabilisation for lending rates may be faster than expected. The report forecasts that in the second quarter of 2026, the NIM of listed banks will decline by a small margin of 1 basis point compared to the first quarter of 2026. Specifically, large state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks are expected to see declines of 1bp, 2bp, 3bp, and 2bp, respectively.
Credit growth is on a declining trend, with loan growth dropping from 6.4% at the beginning of the year to 5.2% by the end of June, driving total social financing growth down by 0.9 percentage points compared to the start of the year. A turning point for credit growth is not expected within this year.
Orient Securities interprets the reasons behind the weakening credit performance. Beyond the impact of loan maturity schedules and changes in the policy environment, it is a natural reflection of the changing financing structure under the current K-shaped economic development in China. In the first half of the year, household short-term and long-term loans saw a year-on-year decrease of approximately 590 billion yuan and 950 billion yuan, respectively. Medium and long-term loans to enterprises decreased by a substantial 1.62 trillion yuan year-on-year. The magnitude of the year-on-year decline has significantly deepened since the second quarter, with persistently weak demand being the core constraint. The report forecasts that by the end of the first half of 2026, the loan growth rate for listed banks will be 6.35%, down 0.6 percentage points from the first quarter of 2026. The growth rate of interest-earning assets is forecast to be 7.39%, down 1.7 percentage points from Q1 2026. Combining the outlook for NIM and scale growth, the report predicts that net interest income for listed banks in the first half of 2026 will grow by 6.6%, a sequential decline of 0.6 percentage points from Q1 2026.
Non-interest income from fees and commissions is expected to grow steadily, while the growth rate of other non-interest income may moderate due to base effects.
Wealth management products (WMPs) and public funds continue to expand. From April to May, the scale of WMPs achieved year-on-year increases, and the scale of public funds maintained a year-on-year growth rate close to 20%. However, considering that both the cumulative and monthly growth rates of premium income have declined, fee and commission income is expected to maintain steady overall growth. The report forecasts that the net fee and commission income of listed banks in the first half of 2026 will grow by 5.9% year-on-year, a slight increase of 0.15 percentage points from Q1 2026. Against a higher base in the second quarter of 2025, the growth rate of other non-interest income is expected to decline slightly on a sequential basis. In the second quarter, bond market interest rates generally continued to trend downwards. While gains and losses from fair value changes are still expected to achieve steady growth, the growth rate is anticipated to be lower than in Q1. This year, small and mid-sized banks have a weaker desire to realise floating gains based on performance targets. Meanwhile, the pressure on large banks' interest rate risk in the banking book (IRRBB) indicators is expected to ease, leading to a weaker desire to realise floating gains compared to last year. However, considering factors such as the delayed implementation of the second tranche of capital injections and the possibility that large banks may pre-emptively create room for indicator manoeuvring ahead of the accelerated pace of government bond issuance in Q3, a slight short-term increase in the realisation of gains by large banks in June cannot be ruled out. The report forecasts that other non-interest income for the first half of 2026 will grow by 9.3% year-on-year, a sequential decline of 2.5 percentage points from Q1 2026.
Profit growth is expected to be stable, with sufficient financial resources enabling increased provisions to be set aside to guard against risks.
Over the next two years, the certainty of revenue improvement for the banking industry is strong, primarily benefiting from the stabilisation of NIMs. Although the growth rate of mid-year revenue may moderate sequentially, it will still represent a substantial rebound compared to the previous three years. Banks possess ample financial resources and are expected to continue focusing on the concentrated disposal and clean-up of non-performing loans (NPLs) in key areas. The intensity of credit impairment provisions may increase, supporting stable expectations for the sector's asset quality. The report forecasts that the credit impairment losses recognised by listed banks in the first half of 2026 will grow by 18.1% year-on-year, a sequential decline of 4.0 percentage points from Q1 2026.
Based on the above core assumptions, the report forecasts that the year-on-year revenue growth rate for listed banks in the first half of 2026 will be 7.0%, a slight sequential decline of 0.7 percentage points from Q1 2026. Specifically, large state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks are expected to see declines of 0.3pp, 1.0pp, 2.0pp, and 1.7pp, respectively. The year-on-year growth rate of net profit attributable to the parent company is forecast to be 2.7%, a slight sequential decline of 0.3 percentage points from Q1 2026, with corresponding declines of 0.1pp, 0.6pp, 1.1pp, and 0.5pp for the respective bank categories. Overall, the earnings growth rate is expected to remain stable, with large state-owned banks showing relatively strong performance.
Risk factors include: a tightening of monetary policy beyond expectations; fiscal policy falling short of expectations; and risks related to the forecasts themselves.
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