Shenwan Hongyuan Group Co., Ltd. released a research report stating that listed banks’ revenue in the first nine months of 2025 grew 0.8% year-on-year (1H25: 1%), while net profit attributable to shareholders rose 1.5% (1H25: 0.8%). This was primarily driven by three factors: stabilized net interest income, recovery in fee-based income from a low base, and steady asset quality ensuring sustainable profitability. Some banks proactively realized bond investment gains to stabilize revenue.
In Q3, patient capital represented by state-owned and insurance institutions continued increasing their holdings in banks, with some accelerating allocations. The Q3 earnings report reaffirmed the resilience of bank profitability, suggesting a potential reversion of bank valuations to 1x book value. Market overreactions may present opportunities to enhance portfolio intrinsic value.
Key insights from Shenwan Hongyuan include: 1. **Credit Growth Moderates but Remains Stable**: The industry is gradually shifting away from scale-driven expansion, with some regional banks prioritizing "volume-price balance." Listed banks’ loan growth slowed by 0.3 percentage points (ppt) quarter-on-quarter (QoQ) to 7.7% in Q3 2025. State-owned banks maintained an 8.5% growth rate, underpinning the sector, while bill financing contributed nearly 70% of quarterly incremental loans. Joint-stock and rural commercial banks further decelerated expansion (down 0.2 ppt QoQ to 3.5% and 6.4%, respectively), constrained by capital and pricing considerations. City commercial banks led with ~13% growth, particularly in high-quality regions like Chengdu-Chongqing and Jiangsu-Zhejiang, where resilient demand supported revenue outperformance.
2. **Net Interest Margin (NIM) Stabilization**: The improvement in funding costs outpaced asset yield declines, driving a temporary NIM recovery. The sector’s NIM remained flat at 1.5% in 9M25 versus 1H25, with Q3 NIM rising 3 basis points (bps) QoQ to 1.5%. Yield on interest-earning assets and cost of interest-bearing liabilities fell by 5 bps and 9 bps QoQ, respectively. As high-cost, long-term deposits mature over 2025–2026, deposit cost reductions may sustain NIM stability, with potential margin rebounds for select smaller banks.
3. **Asset Quality Divergence**: The sector’s non-performing loan (NPL) ratio held steady at 1.22% in Q3, with annualized NPL formation at 0.61% (2024/Q2 2025: 0.60%/0.64%). However, early-warning indicators (e.g., special-mention loans) rose for some banks, notably China Postal Savings Bank and rural commercial banks, reflecting mounting risks in small and micro-enterprise lending. Shenwan Hongyuan emphasizes that banks’ risk absorption capacity hinges on business mix, financial resources, and provisioning buffers.
**Investment Recommendations**: With dividend yields re-entering attractive territory and a disconnect between stable earnings and low positioning, Shenwan Hongyuan remains bullish on banks. The strategy centers on: - **"Leading Banks Anchor Sentiment"**: State-owned banks and China Merchants Bank (龙头搭台) signal sector re-rating. - **"Undervalued Joint-Stock and Quality City Commercial Banks"**: Targets include Industrial Bank (601166.SH), China CITIC Bank (601998.SH), Chongqing Bank (601963.SH), Bank of Suzhou (002966.SZ), and Bank of Jiangsu (600919.SH), benefiting from regional policies and fundamentals. - **Big Banks’ Catch-Up Potential**: Following Agricultural Bank’s (601288.SH) PB exceeding 1x, peers may follow.
**Risks**: Weak demand, slower-than-expected economic recovery, NIM stabilization delays, and unexpected risks in real estate or retail segments.