Zhongtai: From "recession-proof" to "weak cycle", large banks and joint-stock banks are highly recommended.

Zhongtai released a research report stating that the operating model and investment logic of bank stocks have shifted from "pro-cyclical" to "weak cyclical": when the market is strong, bank stocks may be weak in the short term; however, during periods of economic stagnation, bank stocks with high dividends will continue to be attractive, and the stability and sustainability of bank stocks are still favored. There are two main investment themes for bank stocks: one is regional agricultural and commercial banks with strong certainty, including regions such as Jiangsu, Shanghai, Chengdu-Chongqing, Shandong, and Fujian. The other is the logic of stable high dividends, with a focus on large banks and joint-stock banks. Zhongtai's main points are as follows: Net profit: Industry growth has turned positive, with state-owned banks stable, and urban commercial banks showing clear improvement. In 4Q25, the net profit of commercial banks increased by +2.33% year-on-year (compared to -0.02% year-on-year in 9M25), with a quarter-on-quarter increase of 2.35 percentage points. In terms of sub-sectors, the year-on-year growth rates of net profits for state-owned banks, joint-stock banks, urban commercial banks, and rural commercial banks were +2.25%, -2.84%, +12.87%, and +4.57% respectively. Large banks maintained positive profit growth with stable growth rates; joint-stock banks showed weak loan growth and profits remained slightly negative; urban commercial banks maintained relatively high loan growth, coupled with the low base effect brought about by the special refinancing of high-interest loans in the fourth quarter of 2024, as well as the strong start of 2026, resulting in a significant increase in profit growth on a quarter-on-quarter basis; rural commercial banks achieved positive profit growth on a low base. Size: Industry asset and loan growth rates remain stable. In 4Q25, the year-on-year growth rate of industry assets was 9.0% (up by 0.2 percentage points quarter-on-quarter), while the year-on-year growth rate of loans was 7.3% (unchanged quarter-on-quarter); the industry added 1.5 trillion in new loans in a single quarter, an increase of 73.5 billion year-on-year. Breaking it down by sub-sector: state-owned banks saw a rebound in asset growth and a slight decline in loan growth; joint-stock banks saw a slight increase in asset growth and loans stabilized at a low level; urban commercial banks saw a decline in asset growth but a significant increase in loan growth; rural commercial banks saw a slight decrease in loan growth. Net interest margin: The margin continues to remain stable. In 4Q25, the industry's net interest margin was 1.42%, unchanged quarter-on-quarter; among state-owned banks/joint-stock banks/urban commercial banks/rural commercial banks, the margins were 1.30%/1.56%/1.37%/1.60% respectively, with margins remaining stable across all sub-sectors. Asset quality: Non-performing loan ratio and attention ratio both declined, with provisions continuing to be released. At the end of 4Q25, the total amount of non-performing loans in the banking industry was 3.5 trillion, a decrease of 24.1 billion compared to the end of 3Q25; the non-performing loan ratio was 1.50%, a decrease of 2 basis points quarter-on-quarter, with changes in non-performing loan ratios at the end of 4Q25 for state-owned banks/joint-stock banks/urban commercial banks/rural commercial banks at -1bp/-1bp/-2bp/-10bp respectively. This is mainly due to a decrease in the generation rate of non-performing loans. The calculated single-quarter net generation rate of non-performing loans and the cumulative net generation rate for the whole year in 4Q25 were 0.72%/0.68%, a decrease of 3 basis points and 10 basis points respectively compared to 3Q25. In addition, the proportion of attention loans decreased slightly. At the end of 4Q25, the proportion of attention loans was 2.18%, a decrease of 1 basis point compared to the end of 3Q25. The industry's provision coverage ratio and loan-to-provision ratio continued to decline. At the end of 4Q25, the industry's overall provision coverage ratio was 205.2%, a decrease of 1.94 percentage points compared to the end of 3Q25; the loan-to-provision ratio was 3.07%, a decrease of 7 basis points. Looking at different sub-sectors, the provision coverage ratio and loan-to-provision ratio for the four types of banks both decreased. Capital: Capital adequacy ratio slightly increased. At the end of 4Q25, the core Tier 1/Tier 1/capital adequacy ratios of commercial banks (excluding foreign bank branches) were 10.92%/12.37%/15.46% respectively, increases of 4 basis points, 1 basis point, and 10 basis points respectively compared to 3Q25, indicating a slight easing of capital constraints. Risk warning: Economic downturn exceeds expectations, economic recovery falls short of expectations, and data updates are not timely.