China Securities Co., Ltd.: In the first half of the year, the net interest margin of the banking industry has stabilized, and revenue and profits are expected to continue their positive trend.

China Securities Co., Ltd. issued a research report stating that listed banks achieved significant single-digit revenue growth in H1 2026, with profits stabilizing and showing modest single-digit growth, reflecting an overall positive trend. Credit reported significant single-digit growth, with a gradual slowdown in the decline of asset sides and optimized liability costs, leading to a marginal stabilization of net interest margins and an acceleration in net interest income. Middle-income sources showed steady small single-digit growth, indicating an improving trend in the core revenue capacity of listed banks. In contrast, non-interest income exhibited some differentiation due to varying realizations of floating profits. Asset quality appeared stable, with real estate risks accelerating clearance while retail risks continue to surface naturally. Some banks opted to accelerate the clearance of real estate risks during a window period when policies had not yet withdrawn and financial resources remained relatively abundant, which is beneficial for future performance elasticity. Mid-term dividend plans were realized by some banks, with the dividend rates of large state-owned banks uniformly increasing by 1 percentage point, further enhancing their dividend attributes. Looking ahead for the year, listed banks are expected to continue the upward trend in revenue and profits, with a stabilization in the fundamentals. Currently, the banking sector is primarily focused on market hedging, and it is recommended to select targets that excel in fundamentals while maintaining industry leadership and solid dividend yields. Key points from China Securities Co., Ltd. are as follows: In H1 2026, listed banks maintained significant single-digit revenue growth, with marginal stabilization of interest margins, continued acceleration in net interest income, and stable small single-digit growth in middle-income sources. The marginal improvement in core revenues is noted, with listed banks' operating revenues increasing by 7.4% year-over-year in H1 2026, maintaining significant single-digit growth. Specifically, state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks had year-over-year growth rates of 9.4%, 2.8%, 8.1%, and 2.0%, respectively. Specifically, net interest income increased by 8.4% year-over-year, with growth accelerating mainly due to stable growth in scale and reduced costs on the deposit side, leading to marginal stabilization. The capital market continued to heat up, with wealth management businesses performing well, supporting stable small single-digit growth in middle-income sources. The core revenue of listed banks showed a marginal improvement, with a year-over-year growth of 7.1% in H1 2026, an increase of 0.2 percentage points compared to the first quarter. The growth rates for core revenues of state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks were 7.4%, 4.0%, 14.0%, and 7.6%, respectively. Other non-interest income faced some pressure due to last year's high base. However, some banks significantly improved their bond fair value changes while continuing to realize floating profits, leading to limited overall drag on total revenues. Additionally, certain banks did not choose to continue realizing floating profits, despite good performance in net interest income, resulting in some differentiation in the performance of other non-interest income. In H1 2026, profits exhibited slight single-digit growth year-over-year against the backdrop of a significant revenue recovery. Some banks began proactively clearing non-performing loans and increasing provisioning safety cushions. The net profit attributable to shareholders of listed banks increased by 3.0% year-over-year in H1 2026. Among them, state-owned banks, city commercial banks, and rural commercial banks grew by 4.4%, 7.2%, and 3.8% year-over-year, while joint-stock banks saw a decline of 2.6%, facing relative pressure. Profit growth rates for state-owned banks and rural commercial banks improved by 0.77 percentage points and 0.06 percentage points from Q1 2026, while those for joint-stock banks and city commercial banks decreased by 2.17 percentage points and 0.10 percentage points, respectively. From a performance attribution perspective, the cost-to-income ratio decreased, and other non-interest income and middle income contributed positively to net profit by 2.2%, 1.4%, and 0.1%, respectively. Negative contributing factors included increased provisions and narrowed interest margins, which were the main drags, contributing negatively to profit growth rates of 4.3% and 4.0%, respectively. The impact from narrowing interest margins is gradually weakening, but increased provisions have evidently delayed profit release in the first half of the year. It is expected that under the upward trend in revenues, some banks will proactively confirm the clearance of non-performing loans and provisioning before risk-related policies withdraw. The pace of balance sheet expansion has slowed: effective credit demand remains insufficient, with some high-quality regional banks showing good credit growth. The incremental credit mostly came from corporate contributions, with the main sectors being politics and manufacturing: the total assets of listed banks grew by 7.8% year-over-year in H1 2026, a decrease of 1.5 percentage points from Q1 2026. Loan scales increased by 6.5% year-over-year, with a slight decrease of 0.5 percentage points compared to Q1 2026. Credit issuance was primarily corporate loans, with no visible improvement in retail credit demand, while there was a slight surge in bills in the second quarter. Corporate credit related to politics, major infrastructure projects, and financial initiatives remains the main loan focus for listed banks, supported by abundant project reserves, especially in regions like Jiangsu, Zhejiang, Chengdu, and the Pearl River Delta, where credit demand remains relatively strong. In H1 2026, the incremental contributions of corporate loans, retail loans, and bill discounts from listed banks accounted for 90.5%, 1.6%, and 7.9%, respectively. The deposit growth rate declined from the previous quarter, with a slowing trend towards term deposits: in H1 2026, listed banks saw liabilities and deposits increase by 8.1% and 6.2% year-over-year, respectively, both down by 1.4 percentage points and 0.5 percentage points from Q1 2026. Among them, state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks saw deposit scales grow by 6.2%, 4.3%, 10.0%, and 7.0% year-over-year, respectively. Deposits accounted for 71.0% of total liabilities, down by 0.6 percentage points from the previous quarter. The proportion of general interbank liabilities increased by 0.1 percentage points from the previous quarter, likely due to the continuing warming of the capital market leading to a "money migration" phenomenon, but interbank liabilities flowed back into bank accounts. In terms of deposit structure, listed banks' demand deposits accounted for 36.4%, a reduction of 0.5 percentage points from the beginning of the year, indicating a continued trend towards term deposits, albeit at a gradually slowing pace. With the gradual stabilization of the decline in assets and optimized liability costs, net interest margin has basically stabilized: In Q2 2026, the net interest margin (estimated) of listed banks slightly decreased by 1 basis point to 1.49%. Within this, state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks varied by -1 basis point, -1 basis point, +2 basis points, and -4 basis points, respectively, resulting in margins of 1.33%, 1.55%, 1.53%, and 1.52%. The return on assets for listed banks in H1 2026 declined by 15 basis points from H2 2025 to 2.98%, with the LPR remaining unchanged this year. On the other hand, the regulatory direction to mitigate competition pressures on the asset side has become clear, and there is limited room for further reductions in loan rates. In H1 2026, the cost of liabilities for listed banks decreased by 16 basis points from H2 2025 to 1.53%, benefiting from the gradual repricing of maturing term deposits and the bank's optimization of deposit structures, significantly reducing the cost of liabilities and strongly supporting net interest margins. Middle-income sources demonstrated stable small single-digit growth, while other non-interest income showed some differentiation: In H1 2026, non-interest income for listed banks increased by 5.2% year-over-year, with growth rates decreasing by 3.3 percentage points compared to Q1 2026, among which middle-income sources grew by 1% year-over-year. Under a moderately accommodative monetary policy environment, Assets Under Management (AUM) maintained rapid growth, and wealth management scales are expected to gradually rebound each quarter, strongly supporting banks' agency and management businesses. Other non-interest income grew by 8.8% year-over-year, with the state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks experiencing changes of +22.0%, -2.3%, -11.4%, and -16.6% year-over-year, respectively. The other non-interest income exhibited some differentiation, primarily due to the high base effect as many banks realized floating profits from selling AC accounts or OCI accounts to smooth performance in H1 2025. The bond market rates significantly rose in H1 2025, while bond market rates have remained low and stable this year, and bond prices are higher than last year's same period, thus alleviating the fair value change pressures for most banks to some extent, offsetting some high base impacts. Accordingly, large state-owned banks continued to choose realizing floating profits, maintaining high growth in other non-interest income and strongly supporting revenues. In contrast, some city and rural commercial banks, while showing good trends in core revenues, chose to reduce realization of floating profits, resulting in negative year-over-year growth in other non-interest income, causing some drag, although improvements are expected in the second half of the year. Asset quality appeared stable, with a slight increase in the non-performing loan (NPL) generation rate. The clearing of corporate real estate risks accelerated, while retail risks continue to be industry-wide exposures: In Q2 2026, the non-performing loan ratio of listed banks remained flat at 1.22% quarter-over-quarter, with the provision coverage ratio declining by 0.4 percentage points to 233%, indicating overall stability in risk coverage capabilities. The annualized NPL generation rate for listed banks in Q2 2026 was 0.81%, increasing by 2 basis points from the previous quarter and 4 basis points year-over-year, indicating a slight rise in NPL generation. In key sectors, the NPL ratio for corporate loans continued to decline, while the asset quality of corporate loans related to manufacturing and other real enterprises remained strong. Corporate real estate continues to be a core pressure point, with high NPL ratios. Some banks opted to accelerate the clearance of real estate risks during the window period when policies had not yet eased and financial resources were relatively abundant. Due to the law of large numbers, retail loan NPLs expose quickly, and the collection and reminder processes require time; therefore, retail and micro-loan risks remain exposed at an industry-wide and trend level, indicating that asset quality improvements still depend on economic recovery. Mid-term dividends: So far, 17 banks have released clear mid-term dividend plans, with some banks' mid-term dividend proposals for 2026 having passed shareholder meetings, though specific dividend schemes have yet to be disclosed. The dividend rates for the six large state-owned banks have all increased by 1 percentage point to 31% (according to net profit attributable to shareholders), further enhancing their dividend attributes. The mid-term dividend rates for banks such as China Merchants Bank, Shanghai Agricultural Bank, Shanghai Bank, CITIC Bank, and Chengdu Bank are above 30%, similar to the dividend rates in 2025; while the mid-term dividend rates for Minsheng Bank, Changsha Bank, Ping An Bank, and Ningbo Bank are slightly lower than in 2025. Looking at the actual implementation pace of mid-term dividends from 2025, dividends concentrated mainly in December to January of the following year, and it is expected that the mid-term dividends for 2026 will follow this same rhythm. Looking ahead for the year: Scale is expected to maintain stable significant single-digit growth; the year-over-year decline in interest margins is narrowing, and marginal trends are gradually stabilizing; middle-income trends are warming; and revenue is likely to sustain its current good trend. Credit costs have slightly increased, with profits maintaining small single-digit stable growth. 1) In terms of scale, there is no apparent recovery in credit demand, and it is expected that the total loan increment for the year will be roughly the same year-over-year or slightly increased. From a structural perspective, the corporate sectors related to politics and significant initiatives remain the primary focus. 2) The year-over-year decline in interest margins is narrowing, with marginal stabilization. The LPR has stayed unchanged throughout 2026, and regulatory trends toward "anti-involution" have become clear, with reductions in asset-side rates gradually slowing down. Meanwhile, the advertised rates for deposits continue to decline, and after the repricing of maturing term deposits, the liability costs will reduce, potentially narrowing the declines in interest margins. 3) With monetary easing and active capital markets, income from wealth management and other middle-income sources could continue to warm up, leading to an improvement in growth rates for middle-income sources. 4) The bond market remains at low levels of volatility. In the second half of the year, the high base effect is expected to gradually dissipate, relieving pressures on other non-interest income. Other non-interest income is anticipated to have limited impact on revenues in 2026, but volatility and differences between banks are expected to be significant. 5) In terms of asset quality, it is expected that non-performing loan ratios and provision coverage ratios will remain within a stable and reasonable range, with continuous clearance of non-performing loans in corporate real estate and ongoing exposures regarding retail and micro-loan asset quality. In 2026, some banks with favorable core revenue trends and "spare capacity" in performance may utilize the window period before risk mitigation policies like the financial 16 articles withdraw to proactively confirm and clear non-performing loans, increasing provisions against credit costs.