Orient: The banking industry's revenue in the first quarter of 2026 is expected to exceed expectations, with the elasticity of net interest income growth rate potentially considerable.

Orient released a research report stating that the banking sector is expected to return to a fundamental narrative in 2026: in the first year of the start of the 15th Five-Year Plan, with the support of policy financial tools, asset expansion still has resilience; it is still in a cycle of concentrated deposit repricing, supporting the net interest margin is expected to stabilize and rise; the exposure of structural risks still awaits policy support in 2026, the insurance industry will systematically implement I9, and the medium-to-long-term guiding effects of the assessment of public funds are also expected to emerge. The bank sector in 2026 is optimistic about absolute returns. It is recommended to focus on two main lines: 1. State-owned large banks with solid fundamentals and good defensive value; 2. High-quality medium and small banks with confirmed fundamentals. Orient's main points are as follows: The net interest margin is expected to exceed expectations and drive interest net income back into a growth range, with considerable elasticity. On the one hand, effective support for deposit repricing, with the calculation of a positive impact of approximately 16BP on the net interest margin from deposit repricing in 2026, combined with the pace of new deposits in 2023, is expected to be reflected in over 50% in the first quarter of 2026. On the other hand, the bank predicts that the bank loan interest rate in 2026 is expected to bottom out, and banks with low risk appetite for asset deployment and low asset pricing levels are expected to be the first to achieve stable growth in net interest margins. Conservatively predicting, the net interest margin of listed banks in the first quarter of 2026 decreased slightly by 3BP compared to 2025, with state-owned banks/ joint-stock banks/ city commercial banks/ rural commercial banks decreasing by 2BP/3BP/2BP/4BP respectively. The strong performance of the net interest margin is expected to effectively hedge the decline in bank asset growth. Forecasting that the net interest income of listed banks in the first quarter of 2026 will increase by 5.3% compared to 2025, a significant increase of 5.4pct, with state-owned banks/ joint-stock banks/ city commercial banks/ rural commercial banks increasing by 7.7pct/1.1pct/0.8pct/2.7pct to 6.2%/1.1%/10.2%/3.1%. Non-interest income in the first quarter of 2026 is expected to achieve good growth, with core contributions from fair value changes. On the one hand, bank fee net income has achieved year-on-year growth in 2025. In the first quarter of 2026, despite significant fluctuations in the stock market and slower growth in wealth management, there was a high increase in insurance sales. It is predicted that the net fee income of listed banks in the first quarter of 2026 will increase by 7.8% year-on-year, which is 1.9pct higher than in 2025. On the other hand, with a low base figure, other non-interest income is expected to achieve significant growth. Among them, fair value changes are undoubtedly expected to achieve a high year-on-year growth, as the strong smoothing of performance fluctuations and risk management demands for interest rate risks in 2025 banks led to continued high growth in investment income year-on-year, to some extent weakening the elasticity of the growth of other non-interest income in the first quarter of 2026. forecast that other non-interest income of listed banks in the first quarter of 2026 will increase by 8.5% year-on-year, which is 3.5pct higher than in 2025. Banks may use the time window of core revenue improvement in the first quarter of 2026 to accelerate risk disposal and moderately increase provisions. The structural asset quality pressure in the banking industry has not yet shown a turning point. The non-performing loan ratio of public housing and real estate loans in 2025 has systematically increased, and personal loan delinquency rates continue to climb. The credit cost of state-owned large banks began to break through the net generation rate of non-performing loans in 2025 (the first time since 2018). It is expected that the non-performing loan generation rate of banks will still have a certain upward risk in 2026, and banks may fully utilize this time window to accelerate the disposal of risks and moderately increase provisions. forecast that the listed banks will increase their provision for credit impairment losses by 5.9% year-on-year in the first quarter of 2026, 5.3pct higher than in 2025. Based on the above core assumptions, it is predicted that the revenue of listed banks in the first quarter of 2026 will increase by 6.1% year-on-year, a significant increase of 4.8pct compared to 2025, with state-owned banks/ joint-stock banks/ city commercial banks/ rural commercial banks at 6.7%/3.7%/9.3%/3.4%, respectively, higher by 4.4pct/5.4pct/5.7pct/3.9pct than in 2025. Forecast indicates that the pre-provision operating profit will increase by 3.2% year-on-year, 2.2pct higher than in 2025, with state-owned banks/ joint-stock banks/ city commercial banks/ rural commercial banks increasing by 0.8pct/4.2pct/4.2pct/4.8pct, respectively, compared to 2025. The forecast for year-on-year growth in net profit attributable to equity holders is 3.3%, 1.6pct higher than in 2025, with state-owned banks/ joint-stock banks/ city commercial banks/ rural commercial banks increasing by 1.1pct/2.1pct/3.2pct/0.1pct, respectively, compared to 2025. The improvement in profit is slightly lower than that of revenue, mainly due to an increase in credit costs. Risk warnings: Monetary policy tightening beyond expectations; fiscal policy falling short of expectations; calculation of related risks.