Morgan Stanley released a research report noting that despite declines in investment income, most Chinese banks reported improved net interest income growth and healthy fee income in their Q3 2025 results. State-owned banks generally delivered higher profit growth compared to the first half of 2025, supported by stable asset quality. Among peers, Ningbo Bank (002142.SZ) and Agricultural Bank of China (ABC) (01288) stood out with superior performance.

The report highlighted that while state-owned banks and China Merchants Bank (CM BANK) (03968) still face net interest margin (NIM) pressure, most joint-stock banks under coverage saw NIM rebound in Q3 2025. This improvement was driven by lower funding costs and more disciplined loan growth and pricing, supporting net interest income expansion. Notably, MINSHENG BANK (01988) and SPD Bank (600000.SH) achieved both sequential and year-on-year NIM improvements, benefiting from their focus on risk management and customer base enhancement rather than pure scale expansion. Ningbo Bank maintained the strongest net interest income growth due to market share gains and relatively lower NIM pressure.

Morgan Stanley observed persistent NIM pressure for state-owned banks, partly attributable to higher allocations to low-yield bonds and bills in Q3. However, most banks expect further NIM stabilization ahead. Fee income growth rebounded sharply to 11.1% YoY in Q3 from 1.4% in Q2 2025 across the sector, supported by capital market recovery and sustained strength in insurance sales, particularly after the impact of agency fee cuts faded. Ningbo Bank led with 94% YoY fee income growth, while ABC maintained robust 23.6% growth following over 30% growth in Q2.

Although overall operating income and pre-provision operating profit (PPOP) growth slowed due to declining investment income (from rising bond yields), Morgan Stanley views the bond yield recovery and improving core business trends as positive for long-term growth and valuation. Contrary to sector trends, ABC and BANKCOMM (03328) reported higher investment income, revenue, and PPOP, demonstrating strong investment capabilities.

Asset quality remained stable in Q3 2025, with most banks reporting lower credit costs. The average non-performing loan ratio stayed flat at 1.15% for covered banks. While state-owned banks slightly reduced credit costs to support earnings, their NPL coverage ratio only dipped marginally to a still-high 263%. Overall, Chinese banks continued their profit recovery trajectory in Q3: state-owned banks accelerated profit growth to mid-single digits through further credit cost reductions, while performance divergence widened among joint-stock and regional banks.