CGS released a research report stating that while Q3 banking performance faced short-term disruptions from non-interest income, stable scale growth continued to support earnings. Net interest margins (NIM) showed signs of stabilization, with further improvements in net interest income and a sustained recovery in fee-based income. Asset quality remained steady, while provision releases contributed more to net profit growth.

Policy guidance is optimizing banks’ credit structures and protecting NIM, while a recovering capital market is expanding fee-income opportunities. The upcoming 15th Five-Year Plan is expected to drive long-term transformation in the banking sector, with attention on policy effectiveness, industry reforms, and fundamental recovery. Mid-term dividend payouts remain strong, reinforcing the sector’s value appeal. Coupled with incremental capital inflows accelerating valuation reshaping, CGS maintains a positive outlook on the banking sector’s allocation value.

Key takeaways from CGS: 1. **Revenue Growth Temporarily Slows, but Profit Improvement Continues** In Q1-Q3 2025, listed banks reported revenue growth of +0.9% YoY, pre-provision profit growth of +0.62%, and net profit attributable to shareholders growth of +1.46%. While non-interest income weighed on revenue, steady scale expansion supported performance, and provision reversals boosted net profit. State-owned banks led the recovery, with profits returning to positive growth, while city commercial banks maintained sector-leading growth rates.

2. **Moderate Expansion, NIM Stabilization, and Liability Cost Improvements** Net interest income declined -0.62% YoY, but the contraction narrowed compared to H1. Loan growth slowed due to weak demand and debt restructuring, while financial investments increased. Credit structure optimization continued, with strong corporate lending offsetting weaker retail performance. Deposit growth recovered, particularly at state-owned and joint-stock banks, as the impact of manual interest adjustments faded and low-base effects took hold. Term deposits remained the primary growth driver, but duration optimization is underway.

The sample banks’ NIM stood at 1.55%, down 1bp from H1, but the decline narrowed. Deposit rate cuts, term deposit repricing, and proactive liability management supported NIM, with some regional banks showing signs of stabilization or improvement.

3. **Fee Income Recovery Persists Amid Non-Interest Volatility** Non-interest income growth slowed to 4.98% YoY in Q1-Q3, with fee income up +4.6%—a sequential quarterly improvement, driven by capital market recovery and growth in fund distribution and wealth management. Investment income rose 20.59% YoY, but fair value losses from bond market fluctuations weighed on other non-interest income. State-owned banks remained resilient due to their higher allocation-focused portfolios.

4. **Stable Asset Quality, Slight Dip in Provision Coverage, and Capital Needs for Smaller Banks** The non-performing loan ratio held steady at 1.15% by end-September. Corporate asset quality is expected to remain robust, while retail risks are under control. Provision coverage dipped to 283.17% (-4.11pct from H1), with more provisions released to smooth earnings. Core Tier 1 capital adequacy fell 2bps to 10.55%, with city commercial banks seeing larger declines. Some banks have strengthened capital via convertible bonds, but faster loan growth and high capital consumption may necessitate further replenishment.

**Top Picks**: Industrial and Commercial Bank of China (601398.SH), Agricultural Bank of China (601288.SH), Postal Savings Bank of China (601658.SH), Bank of Jiangsu (600919.SH), Bank of Hangzhou (600926.SH), and China Merchants Bank (600036.SH).

**Risks**: Economic underperformance, asset quality deterioration, interest rate declines pressuring NIM, tariff impacts, and weakening demand.