GF Securities has released a research report indicating that as fiscal policy becomes more proactive and terminal interest rates stabilize, investment opportunities in the banking sector are expected to gradually emerge following the disclosure of interim reports, with the industry anticipated to achieve some absolute returns in the fourth quarter. At the individual stock level, with interest rates having bottomed out, investment focus on bank stocks is projected to shift gradually from valuation expansion to profit-driven performance. The report suggests actively monitoring banks with superior core businesses, genuine exposure of non-performing assets, and substantial bond floating profits. Stocks with higher earnings growth rates are expected to maintain relative outperformance in Q3. The main viewpoints from GF Securities are outlined below:
Outlook on the Macro Environment
(1) Fiscal Policy: The pace of fiscal expenditure is expected to accelerate in the second half of the year. As the price index continues to improve, the real return rate is anticipated to bottom out and recover.
(2) Monetary Policy: An overall appropriately accommodative stance is likely to be maintained, but close attention should be paid to potential signals from the central bank shifting gradually from "appropriately accommodative" to "monetarily neutral." The key signal for this shift lies in the transmission of inflation. Significant improvement in foreign exchange settlement and sales has supplemented narrow liquidity, reducing the central bank's need for reserve requirement ratio cuts. Historical analysis shows that the transmission from PPI to CPI typically takes about 2-3 quarters. During an upward cycle, long-term bond yields have historically increased by an average of approximately 20-30 basis points annually. Q4 could be a sensitive window for a potential shift in the central bank's stance.
(3) Credit: It is projected that total social financing growth will gradually recover to around 7.5% after bottoming in Q3 of 2026. Currently, the decline in domestic debt growth has not followed the synchronous slowdown in M2, nominal economic growth, corporate profit growth, or the further decline in prices of major asset classes. This essentially indicates that the banking sector has entered a phase of benign deleveraging.
(4) Liquidity: The pattern of ample liquidity driven by capital inflows is expected to continue. Narrow liquidity is generally accommodative. It is forecasted that the contribution of foreign exchange purchases to the year-on-year growth rate of the monetary base will increase by 5.1 percentage points year-on-year to 3.1% in 2026. However, narrow liquidity may experience periodic tightness during accelerated government bond issuance. From a broad liquidity perspective, the contribution of cross-border capital inflows to M2 growth is expected to increase by 0.28 percentage points year-on-year to 0.86% in 2026. M2 growth is projected at 8.8%, with continued deposit activation and a further narrowing of the growth rate gap between M1 and M2.
(5) Major Asset Allocation: It is estimated that cross-border capital inflows will impact asset liquidity by approximately 24% in 2026, providing significant support to the equity market. In the third quarter, as nominal GDP rises, the equity market is expected to gradually transition from valuation expansion to profit-driven performance. Bond market yields are anticipated to maintain a volatile pattern in Q3, with the risk of rising yields warranting close attention in Q4.
Industry Outlook and Business Conditions
A recovery in core businesses and intensifying divergence in financial markets are expected, with revenue growth leading profit growth. The combined revenue and net profit attributable to parent companies of listed banks are forecasted to grow by 7.9% and 5.2% year-on-year, respectively, in 2026.
(1) Scale: The trend of asset-liability concentration towards large banks is expected to persist, with accelerated deposit disintermediation, non-bank financialization, and demand deposit conversion. Regional divergence driven by exports and emerging industries warrants attention. Banks that proactively lay out in core AI industries, specific regions, and possess strong integrated industrial service capabilities are expected to build core competitive advantages in the new cycle.
(2) Net Interest Margin (NIM): A stabilization and recovery is anticipated. Asset yields are entering a bottoming phase, while continued improvement in funding costs is expected to drive the stabilization and recovery of industry NIM.
(3) Fee-based Income: Demand for wealth management and payment settlement is favorable for steady growth in fee-based income.
(4) Other Non-Interest Income: With interest rates fluctuating at low levels, divergence in financial markets is intensifying. Banks with a lower proportion of investment income and substantial floating profits are expected to demonstrate more stable performance. It is advised to monitor the multiple pressures on net interest income, non-interest income, and capital for small and medium-sized banks with higher bond holdings during the process of interest rate stabilization and recovery.
(5) Asset Quality: As the real return rate recovers, non-performing loan formation is expected to continue declining. In key sectors, corporate real estate loans are entering a final clearing phase, though isolated risk exposures may still cause disturbances, with overall risks deemed controllable. Asset quality in inclusive and small-micro finance remains volatile. The expiration and phase-out of temporary support policies from the pandemic period, along with the softening of rigid "two increases and two controls" assessment criteria, have led to a delayed exposure of risks previously masked by high growth, loan extensions, and rollovers.
(6) Cost-to-Income Ratio: Gradual improvement is expected through cost reduction, efficiency enhancement, and technology empowerment.
Risk Factors
(1) Economic performance falling short of expectations;
(2) Financial risks exceeding expectations;
(3) Fiscal policy strength falling short of expectations;
(4) Policy regulation intensity exceeding expectations.