For stock investors, the authoritative, professional, timely, and comprehensive analyst research reports help uncover potential thematic opportunities. According to CICC Research, since August, the average share price of overseas systemically important banks has fallen by 8%, while large Chinese banks have risen by about 9%, with average year-to-date returns reaching 32%, outperforming overseas peers. Although short-term share price performance is not enough to indicate a long-term trend reversal, the cyclical changes behind it deserve attention. We believe that differences in fiscal policy, interest rates, and credit cycles between China and other countries, as well as the market's repricing of banks' future earnings and balance sheet risks, give Chinese bank stocks relatively favorable risk-reward characteristics. We continue to favor the performance of large Chinese bank stocks relative to overseas peers.
Summary
Fiscal Stance: From Demand Stimulus to Balance Sheet Repair. Both involve government leverage, but overseas fiscal expansion faces inflationary and interest rate upward pressure, while China's fiscal policy places greater emphasis on resolving existing risks. According to data from the Ministry of Finance and the central bank, in 2026 China's broad government financing arrangements include 3.1 trillion yuan for debt swaps and capital injections into financial institutions, accounting for about 22%, which helps mitigate bank credit risk and capital pressure. Recent policies such as mortgage interest subsidies and the expansion of PSL rate cuts further support the recovery of credit demand.
Interest Rate Cycle: From Margin Dividend to Duration Risk. In the early stage of rising interest rates, European and American banks benefit from margin expansion, but as rates remain high, unrealized bond losses and credit cost pressures gradually emerge. By the end of the second quarter of 2026, unrealized losses on US commercial bank bonds were approximately 326.7 billion US dollars. In contrast, China's interest rate environment is relatively stable. In recent years, bond investment returns have supported bank profitability, while future earnings improvement will depend more on the stabilization of net interest margins and the recovery of credit demand.
Credit Cycle: Expansion Space and Deferred Risks. Currently, overseas bank credit growth and asset quality remain strong, but under a high interest rate environment, risks in commercial real estate, private credit, and AI-related high-leverage financing deserve attention. China's credit demand remains weak, but debt swaps and real estate financing policies help mitigate existing risks. Future credit demand recovery awaits further support from fiscal and real estate policies.
Earnings and Valuation: Relative Return Opportunities Amid Cyclical Misalignment. In the first half of 2026, net profit of US and euro area banks grew by approximately 21% and 11% year-on-year respectively, higher than the 3% growth of Chinese listed banks. Overseas banks' profitability remains strong. However, higher profitability has already been reflected in valuations to some extent. The average PB of Chinese listed banks' A/H shares is about 0.6/0.5 times, lower than that of European and American banks. Considering that Chinese bank earnings are expected to remain stable, valuations are relatively low, and long-term funds such as insurance have allocation demand for high-dividend assets, we believe Chinese bank stocks have favorable medium-to-long-term relative return opportunities.
Risks
China's credit demand and asset quality fall short of expectations, and overseas inflation and interest rate trends exceed expectations.
Main Text
Lessons from Global Banking Stocks: East Rising, West Falling. Since August, hit by high interest rates, the average share price of overseas systemically important banks has fallen by 8%, with some large European banks retreating by about 20% from their highs. In contrast, large Chinese bank stocks have shown strong resilience, rising about 9% since August, outperforming overseas peers, with average year-to-date returns reaching 32%, also ranking among the top globally. Although short-term share price performance is not enough to indicate a long-term trend reversal, the cyclical changes behind it deserve attention. Both involve government leverage, so why have overseas bank stocks adjusted while Chinese bank stocks have performed well? Why has the high interest rate environment that benefited European and American banks in recent years begun to become a market concern? We believe this divergence reflects not only differences in the stages of fiscal policy, interest rate, and credit cycles between China and other countries, but also the market's repricing of banks' future earnings and balance sheet risks.
Chart 1: Overseas bank stocks have generally retreated since August, while Chinese bank stocks have outperformed year-to-date. Note: As of October 12, 2026. Source: Wind, Chinese government website, People's Bank of China, CICC Research Department.
Fiscal Stance: From Demand Stimulus to Balance Sheet Repair. Both involve government leverage, but the impact of fiscal policy on bank balance sheets differs between China and other countries. Recent energy price increases have further pushed up inflation expectations, and the market worries that fiscal expansion in overseas economies may increase upward pressure on interest rates. For banks, although long-term interest rates can expand margins, they also increase unrealized bond losses and may raise credit risk by increasing financing costs for the real economy. An important feature of China's fiscal expansion is that a considerable portion of funds is used to resolve existing debt risks and replenish capital for financial institutions, achieving balance sheet repair of the financial system. The 2026 Two Sessions arranged government financing of about 14 trillion yuan (including debt swaps), of which hidden debt swaps of 2 trillion yuan, 800 billion yuan of new special bonds used for debt resolution, and 300 billion yuan of capital injections into financial institutions totaled 3.1 trillion yuan, accounting for about 22% of broad financing arrangements. Specifically, two fiscal-financial coordination policies launched at the end of September can precisely support bank credit demand. Among them, we estimate the mortgage interest subsidy policy can support 1.8 trillion yuan of new loans annually; the PSL rate cut provides policy banks with stable, lower-cost funding sources for "six networks" lending. We estimate that "six networks" investment during the "15th Five-Year Plan" period can cumulatively drive loans exceeding 16 trillion yuan (see "Financial Signals from Mortgage Interest Subsidies and PSL Rate Cuts").
Chart 2: Mortgage interest subsidies and PSL rate cut expansion complete this year's financial policy puzzle. Source: Wind, Chinese government website, People's Bank of China, CICC Research Department.
Chart 3: Part of China's broad fiscal financing is for capital injections into financial institutions and debt swaps. Note: 2023 is listed according to the adjusted budget plan, others according to fiscal budget; 2020-2022 includes special bonds for small and medium-sized bank capital within the new special bond quota; 2025-2026 are special treasury bonds for capital injections into financial institutions. Source: Wind, Ministry of Finance, CICC Research Department.
Interest Rate Cycle: From Margin Dividend to Duration Risk. In the early stage of rising interest rates, banks often benefit more from margin expansion, but in the middle and late stages of rate increases, disadvantages such as unrealized bond losses and rising credit costs gradually emerge. According to FDIC data, as of the end of the second quarter of 2026, unrealized losses on available-for-sale and held-to-maturity bonds of US banks totaled approximately 326.7 billion US dollars, accounting for 5.5% of the amortized cost of related securities. The 2023 Silicon Valley Bank incident showed that when long-term bond unrealized losses combine with liability-side liquidity pressure, interest rate risk can turn into actual losses. In contrast, China's banking sector is in a relatively stable interest rate environment. In recent years, bond investment and trading-related income has become an important support for non-interest income of Chinese listed banks. According to our estimates for listed banks, from 2023 to the first half of 2026, other non-interest income contributed an average of about 1.7 percentage points to profit growth annually. Of course, as domestic interest rates fall to low levels, the space for realizing unrealized gains on existing bonds is limited. Future profit improvement of Chinese commercial banks will rely more on the stabilization of net interest margins and the recovery of credit demand.
Chart 4: Overseas long-term bond yields rise, while China's rates are stable. Source: Wind, CICC Research Department.
Chart 5: Rising interest rates lead to unrealized bond losses for US commercial banks. Source: FDIC, CICC Research Department.
Chart 6: Realization of unrealized bond gains has become one of the factors contributing to profits of Chinese listed banks in recent years. Source: Wind, CICC Research Department.
Credit Cycle: Expansion Space and Deferred Risks. From the perspective of credit impulse, overseas bank credit is still in an expansion stage, while China's credit cycle is at a historically low level. Overseas credit growth is supported by earlier rate cuts on one hand, and on the other hand includes working capital demand from rising inflation and investment in new industries such as AI. In contrast, China's credit demand remains weak, with new financing relying more on policy-supported areas such as infrastructure and manufacturing. We believe the more noteworthy issue is credit risk. Currently, overseas banks' non-performing loan indicators remain at low levels, but under a high interest rate environment, three areas deserve attention: high financing costs combined with rising vacancy rates put pressure on commercial real estate loans; redemption pressure on private credit and banks' financing exposure to non-bank financial institutions; AI-related high-leverage project financing may face return and refinancing pressure. In China, the non-performing loan ratio remains generally stable. Debt swaps and real estate financing policies help alleviate risk exposure. Household loan pressure has increased somewhat but is generally controllable. We believe future repair of China's credit cycle awaits further support from fiscal and real estate policies, while the overseas credit cycle faces more challenges under a high interest rate environment.
Chart 7: From a credit cycle perspective, overseas is in the mid-to-late expansion stage, while China awaits recovery. Note: China's credit impulse uses new social financing/GDP, overseas uses new loans/GDP. Source: Wind, CICC Research Department.
Chart 8: From a default cycle perspective, both China and overseas credit risks are at low levels. Source: Wind, CICC Research Department.
Chart 9: US non-performing loan ratios across various loan types are at low levels. Source: FDIC, CICC Research Department.
Chart 10: China's non-performing loan ratios across various loan types are diverging. Source: Wind, CICC Research Department.
Chart 11: US banking credit conditions remain generally loose. Source: Haver, CICC Research Department.
Earnings and Valuation: Relative Return Opportunities Amid Cyclical Misalignment. From current earnings, European and American banks benefit from a higher interest rate environment and improved capital market business, while credit growth and asset quality remain resilient. Fundamentals still have advantages compared to Chinese banks. In the first half of 2026, net profit of US banks grew by about 21% year-on-year, major euro area banks by about 11%, while Chinese listed banks grew by about 3%; in the first half of 2026, US bank ROE was about 13%, major euro area banks about 11%, showing an upward trend; Chinese listed bank ROE was about 10%, slowly declining due to lower profit growth. But from a valuation perspective, the higher profitability of overseas banks has already been reflected in share prices to some extent. Currently, the average price-to-book ratio of Chinese listed banks' A/H shares is about 0.6 and 0.5 times, while European and American banks are generally above 0.8 times, with some large banks reaching 1.5-3.0 times. From the correlation analysis of price-to-book and ROE, some Chinese banks' valuations have become somewhat attractive. Looking ahead, we believe Chinese listed banks' net profit growth is expected to remain stable over the next 1-2 years. If fiscal stimulus can further drive credit demand recovery, there is room for improvement in bank profit growth. In contrast, European and American banks still have higher profitability but may face more uncertainty under a high interest rate environment. Considering the lower valuations of large Chinese banks, stable dividend capacity, and continued demand from long-term allocation funds such as insurance for high-dividend assets, we believe Chinese bank stocks have favorable relative risk-reward characteristics compared to overseas banks in the medium to long term.
Chart 12: Commercial bank profit growth in the US, Germany, and Japan has been higher than China in recent years, with ROE showing an upward trend. Source: Bloomberg, CICC Research Department.
Chart 13: From a global bank valuation comparison, some Chinese banks' valuations have become somewhat attractive. Note: Data as of October 9, 2026. Based on Bloomberg consensus estimates. Source: Bloomberg, CICC Research Department.
Chart 14: Overseas bank CDS spreads have recently risen, but absolute levels remain low. Note: As of October 9, 2026. Source: Bloomberg, CICC Research Department.
Risk Disclosures
1. China's credit demand recovery falls short of expectations. If household and corporate financing demand remains weak, and the transmission effects of fiscal stimulus and structural monetary policy fall short of expectations, it may affect bank credit growth and profit improvement. Weak credit extension will directly suppress the expansion of interest-earning assets, delay the pace of net interest margin stabilization and recovery, and drag down the speed of bank profit repair.
2. China's bank asset quality deteriorates more than expected. If risks in real estate, local financing platforms, and household retail loans further expose, it may push up bank credit costs and affect profitability and capital adequacy levels. Accelerated exposure of existing risks will increase provisioning pressure and erode bank profits.
3. Overseas inflation and interest rate trends exceed expectations. If overseas inflationary pressure eases, interest rates fall, or economic growth resilience exceeds expectations, it may improve the earnings outlook for overseas banks and weaken the relative return advantage of Chinese bank stocks.
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