Everbright Securities has released a report projecting that the net interest margin for the banking sector in 2025 will follow an L-shaped pattern. It is estimated that the net interest margin for commercial banks will decrease by 10 basis points over the year, settling at 1.42%, with the largest quarterly decline of 9 basis points occurring in the first quarter. Looking ahead to 2026, the report indicates that the "self-discipline floor" for loan interest rates will be reinforced, leading to a continued stabilization in the pricing of newly issued loans. The pricing of existing loans is expected to converge rapidly with marginal pricing levels. Once the repricing of loans linked to the Loan Prime Rate (LPR) is completed, the potential for further declines will be limited. Concurrently, the repricing of maturing deposits and enhanced self-regulation of high-cost active liabilities will contribute to a steady reduction in liability costs. Everbright Securities anticipates that net interest margins will stabilize in the first quarter of 2026, with a foundation for ongoing improvement on the liability side, essentially confirming an upward inflection point within the year. The key viewpoints from Everbright Securities are outlined below.

The deceleration in asset pricing is easing the negative pressure on net interest margins. Firstly, the pressure from loan repricing at the beginning of the year is gradually diminishing, and the self-regulation of newly issued loan rates is being strengthened. In 2025, the LPR was reduced only once by 10 basis points in May. The repricing of corporate and retail loans at the start of this year is expected to be less pronounced than in previous years. Against a backdrop of "anti-internal competition," self-imposed constraints on loan rates have been tightened. Corporate loan pricing now references post-tax government bond yields and credit bond rates for similar tenors and issuers, while retail loan pricing increasingly considers factors such as Economic Value Added (EVA) and Risk-Adjusted Return on Capital (RAROC). The spread of newly issued loan rates over or under the LPR has remained relatively stable, with no further declines for eight consecutive months. Secondly, the decline in coupon income from investment portfolios continues to exert a negative, albeit limited, impact on net interest margins. It is projected that broad market interest rates will fluctuate within a range this year, keeping coupon income from banks' proprietary investment portfolios under pressure. On one hand, the reinvestment yield for maturing bonds is lower, with an initial estimate suggesting a 3-4 basis point impact on net interest margins from bond repricing within the year. On the other hand, the lower coupon rates on new investments marginally dilute the overall returns, estimated to drag net interest margins down by approximately 2 basis points. The total negative impact on net interest margins from declining coupon income on financial investments for the full year is around 5 basis points. Thirdly, falling market interest rates are pulling down the yields on interbank assets. Amid a moderately accommodative policy stance, the central bank has provided ample liquidity. The high retention rate of maturing deposits within the banking system, coupled with well-matched growth in deposits and loans, has led to stable and loose funding conditions, resulting in a noticeable decline in short-term rates. This is preliminarily estimated to squeeze net interest margins by about 1 basis point.

Significant improvements in liability costs are providing a stronger positive contribution to net interest margins. Firstly, there remains substantial room for reducing core liability costs. Approximately 84 trillion yuan in deposits are expected to mature within the year. If these are fully retained and rolled over, it is estimated that net interest margins could improve by about 15 basis points, with an 8 basis point improvement anticipated in the first quarter of 2026. The trend towards the fixed-term allocation of new deposits has moderated, with average deposit tenors shortening. The optimization of deposit structure is beneficial for managing liability costs. Additionally, stricter controls on the scale of high-cost products such as structured deposits, large-denomination certificates of deposit, and agreement deposits are guiding liability costs further downward. Secondly, the cost of active liabilities is improving. The central bank's supportive stance towards market liquidity is evident, leading to a further decline in the cost of borrowing from the central bank. As broad market rates fall and interbank liquidity remains ample, rates on negotiable certificates of deposit and financial bonds are declining and are expected to stay at relatively low levels, despite potential upward adjustments due to increased supply, constrained by the central bank's neutrally accommodative "master gate" policy. Thirdly, self-regulation of interbank liability pricing is being strengthened. Recent enhancements to the self-disciplinary management of pricing for non-bank financial institutions' current interbank deposits may be followed by further arrangements for interbank time deposits not previously covered. Based on prior calculations, stricter self-regulation of high-cost interbank current and time deposits is estimated to improve net interest margins by 2 basis points.

Looking ahead to 2026, net interest margins are expected to bottom out and stabilize in the first quarter, with an upward inflection point largely confirmed within the year. Changes in the pricing of market-based assets and liabilities are projected to have an overall neutral impact on net interest margins, with the primary focus being the effect of declining deposit and loan rates. Comprehensive calculations suggest that lower loan pricing may drag full-year net interest margins down by approximately 10 basis points, while improvements in deposit costs could provide a positive contribution of around 15 basis points. The impact of lower loan rates will be concentrated in the first quarter of 2026, while there remains further potential for deposit rate repricing. Net interest margins are expected to stabilize in the first quarter of 2026, with a cumulative increase projected for the full year.

Risk factors include a lack of improvement in real economy financing demand leading to a larger-than-expected decline in loan rates; inaccuracies in estimating the cost improvement from deposit maturities and rollover repricing; and unexpected developments in the self-regulation of interbank deposit pricing.