Orient Securities released a research report stating that the banking sector is expected to return to fundamental narratives in 2026. As the beginning year of the 15th Five-Year Plan, asset expansion is projected to remain resilient with support from policy financial tools. The sector remains in a cycle of concentrated deposit repricing, which is expected to support net interest margins in stabilizing and rebounding. Structural risk exposures continue to anticipate policy backing. In 2026, the insurance industry will systematically implement IFRS 9, and the medium to long-term guiding effects of new public fund assessment regulations are also expected to emerge. The firm is optimistic about absolute returns in the banking sector for 2026. It recommends focusing on two main themes: 1) State-owned large banks with stable fundamentals and strong defensive value; and 2) High-quality small and medium-sized banks with certain fundamentals. The key views of Orient Securities are as follows:

Net interest income supported revenue rebound, with marginal improvement in profits. By 26Q1, the cumulative year-on-year growth rates for revenue, PPOP, and net profit attributable to parent company shareholders of listed banks were +7.6%, +9.8%, and +3.0% respectively, representing increases of 6.2 percentage points, 9.0 percentage points, and 1.6 percentage points compared to 25A. Breaking down the figures, net interest income growth rose by 7.2 percentage points from 25A, significantly reducing the drag from interest margins on performance. Fee-based income growth decreased by 0.3 percentage points from 25A, while other non-interest income growth increased by 8.2 percentage points from 25A. The bond market performed steadily, with substantial growth in fair value change gains and profits, though the realization of floating profits was notably restrained. Against the backdrop of significant revenue improvement, banks generally increased provisions for impairment losses, with state-owned large banks being particularly prominent, leading to a divergence in the improvement of PPOP and net profit attributable to parent company shareholders.

By sector, state-owned banks showed the greatest elasticity in revenue improvement driven by net interest income. Joint-stock banks had not yet turned positive in profit growth, with a slight widening in the decline, resulting in relatively weaker performance. City commercial banks maintained good growth momentum, with those in Jiangsu, Zhejiang, and Shandong regions performing notably well. Rural commercial banks showed overall smaller improvements in performance.

Asset expansion continued to slow, while financial investment growth remained steady. By 26Q1, the growth rate of interest-earning assets decreased by 0.4 percentage points compared to 2025. Loan growth was relatively weak, down 0.3 percentage points from 2025, affected by factors such as de-emphasis on total volume, weak demand, tightening consumer finance policies, risk exposures in key areas, and proactive recognition. Structurally, the proportion of retail credit further declined. Bond allocation continued to strengthen, with financial investment maintaining steady growth, up 0.6 percentage points from the end of 2025. Structurally, large banks further increased allocations to amortized cost, while small and medium-sized banks relatively increased allocations to other comprehensive income.

By sector, state-owned banks generally saw a decline in credit growth, while financial investment growth increased by 1.5 percentage points. Joint-stock banks had relatively weak absolute credit growth but showed marginal stabilization, achieving higher year-on-year credit growth in 26Q1. City commercial banks experienced more noticeable slowing in asset expansion, with loan and financial investment growth rates down by 1.1 and 2.0 percentage points respectively. In contrast, rural commercial banks saw a rebound in loan and financial investment growth, becoming another sub-sector achieving higher year-on-year credit growth.

On the liability side, deposit growth remained generally stable, with large banks showing the smallest decline in deposit growth rates. Banks demonstrated weak willingness to issue certificates of deposit, as the growth rate of bonds payable decreased by 12.6 percentage points from 25A. Among them, large banks saw a significant decline of 23.0 percentage points in growth rate despite a higher base.

Net interest margin slightly decreased by 1 basis point from 25A, with some individual stocks showing strong rebounds and a significant narrowing in the decline of asset-side yields. The calculated net interest margin for 26Q1 was 1.32%, down 1 basis point from 25A, generally continuing the stabilization trend. Improvement in liability costs provided important support, with the calculated interest-bearing liability cost down 21 basis points from 25A, though the rate of improvement narrowed by 6 basis points year-on-year. The calculated yield on interest-earning assets decreased by 19 basis points from 25A, with the decline significantly narrowing by 14 basis points year-on-year. As the effects of deposit repricing gradually diminish, the support from liability-side improvements for interest margins may marginally decrease. However, the marginal trend of asset-side yields is expected to gradually stabilize, providing a solid foundation for longer-term net interest margin stability.

By sector, rural commercial banks benefited the most from liability cost improvements in 26Q1, showing the largest marginal improvement in net interest margins. State-owned banks outperformed other sub-sectors in narrowing the decline of interest-earning asset yields from the beginning of the quarter.

Potential asset quality pressures persist, with active increases in provisions for risk disposal. By 26Q1, the non-performing loan ratio increased by 1 basis point from the end of 2025, while the special-mention loan ratio rose by 3 basis points from the beginning of the year. The calculated net NPL formation rate increased by 66 basis points year-on-year, indicating some elevation in asset quality pressures. Improvement in the NPL ratio relies more on active disposal of non-performing loans, with NPL write-offs in 25A and 26Q1 increasing by 6% and 24% year-on-year respectively. By sector, joint-stock banks showed the smallest increase in net NPL formation. By area, both real estate and individual loan NPL ratios rose. The calculated credit cost in 26Q1 fell below the net NPL formation rate more deeply, indicating a further weakening of profit replenishment momentum from provisions. Combined with a significant increase in credit costs and declines in provision coverage and loan loss provision ratios from the beginning of the year, banks may have engaged in relatively active risk disposal.

Risk warnings include unexpected tightening of monetary policy, fiscal policy falling short of expectations, and potential impacts of assumption changes on calculation results.