Guosen: The core of the banking industry remains the stabilization of net interest margins. We maintain our judgment that listed banks are bottoming out with marginal improvements in performance.

Guosen has released a research report stating that the financial regulatory authority disclosed the major regulatory indicator data for commercial banks in the second quarter of 2026. The industry experienced a slight year-on-year decrease of 0.6% in net profit during the first half of 2026. Specifically, the growth rate of industry assets has slightly retreated, the net interest margin has stabilized significantly, and the deterioration rates of asset quality-related indicators such as the non-performing loan ratio, attention loan ratio, and provision coverage ratio have shown minimal changes. The institution believes that the current signs of net interest margin stabilization are evident, and it maintains the judgment that the performance of listed banks is bottoming out with marginal improvement. However, it should be noted that in the case of significant relief in revenue pressures, listed banks are expected to prioritize increasing their provision allocations rather than releasing profits. Therefore, the expected rebound in profit this year will likely be lower than the rebound in revenue, with the growth rate of net profit attributable to the parent company of listed banks expected to improve slightly. The main points from Guosen are as follows: Overall industry net profit declines slightly year-on-year, with a narrower decline compared to the first quarter. In the first half of 2026, commercial banks achieved a net profit of 1.24 trillion yuan, a year-on-year decrease of 0.6%, but the decline was narrower compared to the first quarter. By bank type, large state-owned banks and city commercial banks experienced year-on-year net profit growth of 1.6% and 7.4%, respectively, while joint-stock banks and rural commercial banks saw year-on-year net profit reductions of 3.4% and 12.6%. Due to the limited disclosure of regulatory indicators, it is difficult for the institution to dissect the specific factors influencing net profit growth. However, based on the first quarter reports of listed banks, it is expected that changes in net profit growth will still primarily benefit from the stabilization of net interest margins. In light of the alleviation of revenue pressures, banks may increase their provision allocations to respond to future uncertainties, which will keep profit growth at a relatively low level. For the entire year, the institution expects that benefiting from stabilized net interest margins, the overall revenue growth rate of listed banks will rebound compared to last year, but the increase in provision allocations will lead to a lower increase in net profit growth compared to revenue growth. Asset growth slightly retreats. In the second quarter of 2026, the total assets of the entire industry grew by 7.5% year-on-year, exhibiting a slight decline in growth rate. By bank type, joint-stock banks saw a slight recovery in growth from a low base, while asset growth rates for all other types of banks have decreased. The decline in the asset growth rate for banks is influenced not only by weak short-term credit demand but also represents a long-term trend. Commercial banks have faced weak credit demand this year, so the slight retreat in industry asset growth is a normal phenomenon. However, it is also important to note that this is a long-term trend. The central bank highlighted in its latest quarterly monetary policy implementation report that "in recent years, capital-intensive industries such as real estate and infrastructure have been undergoing continuous adjustments, while new types of productive forces are becoming lighter, leading to a natural decrease in loan demand." This change signifies a long-term trend in economic structural transformation and upgrading. Therefore, the institution predicts that the industrys asset growth will find it difficult to show a noticeable rebound in the future and is expected to maintain at current or even lower levels. Net interest margin stabilizes. In the second quarter of 2026, the industry-wide net interest margin was 1.41%, showing a slight increase of 1 basis point from the first quarter and a slight decrease of 1 basis point from the fourth quarter of 2025. Overall, there are clear signs of stabilization in the net interest margin across different types of banks. The stabilization of net interest margins for commercial banks is mainly attributed to improvements in liability costs brought about by the repricing of time deposits, which has allowed the reduction in liability costs to keep pace with the decline in returns on interest-earning assets. The institution expects that the net interest margins of commercial banks will remain stable throughout the year. Asset quality indicators show little change. Asset quality-related indicators have slightly worsened on the margins, but the changes over a more extended period are not significant. By the end of the second quarter of 2026, the non-performing loan ratio across the industry was 1.52%, an increase of 1 basis point from the end of the first quarter; the attention loan ratio was 2.21%, an increase of 4 basis points from the end of the first quarter; and the provision coverage ratio was 203%, remaining unchanged from the end of the first quarter. Examining different types of banks, city commercial banks show a slight upward trend in their non-performing loan ratios, while other types of banks maintain relatively stable non-performing loan ratios. The provision coverage ratios across various types of banks are also relatively stable. A more core indicator for assessing bank asset quality is the non-performing loan generation rate. Based on the data from listed banks, the overall asset quality of banks remains stable, with the non-performing loan generation rate holding steady at around 0.7% for several years. However, the current challenge for banks is that "loan impairment losses/non-performing loan generation" is below 100%, indicating insufficient provision allocations. Therefore, the institution predicts that, assuming stabilized net interest margins and a rebound in revenue growth, banks will prioritize increasing their provision allocations to address future uncertainties rather than prioritizing profit releases. This may also explain why the overall net profit growth of commercial banks continues to decline slightly despite the stabilization of net interest margins. Investment suggestions. The institution maintains its judgment that the performance of listed banks is bottoming out and improving marginally, mainly benefiting from the stabilization of net interest margins. Thus, it maintains an "outperform the market" rating for the sector. It continues to recommend a dual strategy focusing on "stable dividends" and "high-quality city commercial banks," with "stable dividends" prominently recommending China Merchants Bank and "high-quality stocks" prominently recommending Bank of Ningbo. Risk warnings. If the macroeconomy experiences a significant downturn, it could affect the banking sector in various ways, such as the negative impact of loose monetary policy on net interest margins during economic downturns, and the potential adverse effects on banks' asset quality due to decreased borrower repayment capacity during economic declines.