Daiwa: Initiates Coverage of Chinese Banks with Positive Ratings; Worst of NIM Compression Is Over

Daiwa released a research report initiating coverage of Bank Of China with a positive rating, and initiating China Construction Bank Corporation (00939) with a "Buy" rating, China Merchants Bank (03968) with an "Outperform" rating, and Industrial and Commercial Bank of China (01398) with a "Hold" rating. The bank believes that the worst period for the industry's net interest margin (NIM) has passed. After three years of margin erosion and earnings stagnation, the Chinese banking sector now has conditions for a mild but meaningful stabilization, and it expects Chinese bank stocks to see revenue growth of 5% to 6% in 2026-2027. The bank pointed out that the industry's NIM has cumulatively narrowed by 68 basis points since 2021. It estimates that about RMB 108 trillion in high-cost existing deposits will mature this year, which is expected to bring a 21.4 basis point decline in funding costs in 2026; on the asset side, the repricing of about RMB 38 trillion in mortgages has been fully absorbed, and the PBOC has also paused cuts to the loan prime rate (LPR). The bank forecasts that the industry's NIM will stabilize at 1.40% to 1.41% in 2026-2027, implying a narrowing of only 1 to 2 basis points per year (compared with a narrowing of 10 to 22 basis points per year in 2023-2025), with NIM turning from a headwind to neutral for the first time since the pandemic. Asset quality is controllable, as the property non-performing loan ratio peaked at 3.89% in 2023, and most of the stock of risk has already been provisioned; the dividend yield of Chinese bank H-shares is about 5% to 6%, about 385 basis points higher than the 10-year government bond yield, and combined with a 300 to 400 basis point core tier-1 capital adequacy ratio buffer, this helps support dividends and share prices.