Orient: The bank's operating profit remains relatively stable, with the net interest margin showing steady performance, which continues to drive results beyond expectations.

Orient released a research report stating that the banking sector is expected to return to a fundamental narrative by 2026: considering that banks are still in a period of concentrated deposit repricing, the support for net interest margins is expected to achieve a phase-wise, structural stabilization and rebound; structural risk exposure is still expected to be supported by policies, and industry revenue is expected to continue improving in 2026-2027. At the same time, considering that the pressure of bank stocks' Central Bank reserve fund reduction has significantly eased, market risk preferences and style rebalancing are expected to help banks achieve a higher probability of relative returns in the short term. It is recommended to focus on two main themes: 1. High-quality small and medium-sized banks with certain fundamentals; 2. State-owned major banks with stable fundamentals and good defensive value. Orient's main points are as follows: Net interest margins are expected to remain stable, still a core factor supporting the sector's profit resilience. Further repricing of term deposits will release more improvement space in liabilities costs, combined with self-regulation of interbank liabilities, decline in non-bank term deposit rates, it is estimated that the improvement in the cost of liabilities over the whole year of 2026 will be 30 basis points or more, with a 70%+ realization in the first half of the year. In terms of new loan interest rates, the stabilization pace may be faster than expected. The bank forecasts that net interest margins of listed banks in the second quarter of 2026 were slightly down by 1 basis point from the first quarter, with State-owned banks/joint-stock banks/city commercial banks/rural commercial banks down by 1 basis point/2 basis points/3 basis points/2 basis points respectively. The trend of credit growth is down, from 6.4% at the beginning of the year to 5.2% at the end of June, leading to a 0.9% decrease in social financing growth since the start of the year, making it difficult to see a turning point in credit growth for the rest of the year. The bank understands the reasons behind the weakening credit, which are not only affected by credit maturity and policy changes, but also a natural reflection of the change in financing structure under the current K-shaped economic development in China. In the first half of the year, short-term and long-term loans to households increased by about RMB 590 billion and RMB 950 billion year-on-year respectively, while long-term loans to enterprises decreased by RMB 1.62 trillion year-on-year, with a significant increase in the decrease since the second quarter, indicating a persistent weakness in demand. It is forecasted that as of the first half of 2026, the loan growth rate of listed banks was 6.35%, down by 0.6 percentage points from the first quarter, and interest-earning assets growth rate was 7.39%, down by 1.7 percentage points from the first quarter. Taking into account net interest margins and scale growth, the bank forecasts that the net interest income of listed banks in the first half of 2026 will be 6.6%, down by 0.6 percentage points from the first quarter. Middle-income is expected to grow steadily, while non-interest income may marginally decline due to base effects. Wealth management and public mutual funds continue to expand, with both wealth management and public mutual funds experiencing year-on-year growth in assets under management in April and May, while public mutual funds maintain a growth rate of nearly 20% year-on-year. However, considering the decrease in premium income, as well as the leveling off of monthly growth rates, middle-income overall remains stable. The bank forecasts that the fee-based net income of listed banks in the first half of 2026 will increase by 5.9% year-on-year, up by 0.15 percentage points from the first quarter. Given the high base in the second quarter of 2025, other non-interest income is expected to have a marginal decline in growth rate. Interest rates in the bond market continued to decline in the second quarter, and fair value changes are still expected to grow steadily, but at a slower rate than in the first quarter; small and medium-sized banks are weaker in realizing profits based on performance demands, while major banks' pressure from IRRBB is expected to ease, and with the expectation of accelerated issuance of government bonds in the third quarter, large banks may adjust their indicators earlier. It is projected that other non-interest income in the first half of 2026 will increase by 9.3% year-on-year, down by 2.5 percentage points from the first quarter. Profit growth expectations are stable, with sufficient financial resources to increase provisioning to resist risks. Over the next two years, the improvement in bank revenue is highly certain, mainly due to the stabilization of interest margins. Although the growth rate of mid-year revenue may decline marginally, it is still significantly higher than that of the previous three years. Banks have sufficient financial resources and are expected to continue focusing on disposing of bad assets in key areas, with a possible increase in provisions for credit losses, supporting expectations of stable asset quality for the sector. It is forecasted that the year-on-year increase in listed banks' provisioning for credit losses in the first half of 2026 will be 18.1%, down by 4.0 percentage points from the first quarter. Based on the core assumptions above, it is predicted that the year-on-year revenue growth of listed banks in the first half of 2026 will be 7.0%, down by 0.7 percentage points from the first quarter, with State-owned banks/joint-stock banks/city commercial banks/rural commercial banks declining by -0.3 percentage points/-1.0 percentage points/-2.0 percentage points/-1.7 percentage points respectively; year-on-year growth in net profit attributable to the parent company will be 2.7%, down by 0.3 percentage points from the first quarter, with State-owned banks/joint-stock banks/city commercial banks/rural commercial banks declining by -0.1 percentage points/-0.6 percentage points/-1.1 percentage points/-0.5 percentage points respectively. Overall performance growth remains stable, with State-owned major banks performing relatively well. Risk Warning Monetary policy tightening beyond expectations; fiscal policy falling short of expectations; risks calculated. (Translated from Chinese)