Shenwan Hongyuan Group: Steady performance growth, continuously strengthened provisions, banks' "high-quality dividend" attribute more prominent, banking industry 2026 Q3 earnings preview

Shenwan Hongyuan Group released a research report stating that 2026 is a year with certain fundamental support for banks, and it is expected that the third-quarter reports of listed banks will continue the trend of "revenue improvement and steady profit growth." Combined with favorable catalysts such as multiple banks implementing interim dividends in the fourth quarter and patient capital expected to return, the bank sector is viewed favorably. At present, investors should continue to grasp high-quality city commercial banks and state-owned large banks with the strongest certainty of fundamental improvement, maintaining the judgment that "state-owned large banks will steadily raise the sector's valuation center, and high-quality city commercial banks will be the first to stand above 1x PB." However, the report additionally notes that investors can begin to focus on joint-stock banks at the lowest valuations, which are expected to solidify their earnings bottom within the year and benefit from real estate policy catalysts. The main views of Shenwan Hongyuan Group are as follows: We believe that listed banks will still deliver decent revenue and profit performance in their third-quarter reports, with stable net interest margins and elastic non-interest income jointly supporting revenue in maintaining relatively high prosperity. This will continue to validate the report's core view over the past year: 2026 is a year of revenue improvement and provision consolidation for banks. Looking ahead to the fourth quarter, based on: the sustainability of bank statement improvement, the implementation of interim dividends by some banks, and renewed catalysis from patient capital allocation, it is expected that A-share bank sector may once again see valuation repair. The report maintains the judgment that "the sector's valuation center will move up further (state-owned large banks have phased catalysts, and please also focus on joint-stock banks at the lowest valuations), and high-quality regional banks will break through 1x PB." Overall, on the basis that the drag on revenue from net interest margins is gradually diminishing, non-interest income in the third-quarter reports may also deliver better-than-expected performance. Benefiting from steady revenue improvement, net profit attributable to parent companies will also show good marginal changes, but constrained by "increasing provisions and consolidating provisions," the elasticity of profit growth within the year is relatively limited. According to the report's model forecasts for key listed banks, it is expected that 9M26 revenue of listed banks will grow 7.7% year-on-year (1H26: 7.5%); on this basis, with provisions consolidated, net profit attributable to parent companies is expected to grow 3.2% year-on-year (1H26: 2.9%): On the one hand, it is expected that state-owned large banks will recognize part of the fair value changes from holding CXMT Corporation; on the other hand, some small and medium-sized banks also had a low non-interest base in the same period last year. Investors can retain some expectations for non-interest income. For interest income, the positive contribution from volume growth will decrease, which is also in line with market expectations; on the price side, it is expected that the downward space for loan interest rates in 3Q26 will be very limited, but the scale of deposit repricing on the liability side is also decreasing, so the report judges that the quarterly trend of net interest margins may be slightly weaker than in the first half, without affecting the overall trend of full-year net interest margin stabilization. State-owned banks and high-quality city commercial banks are expected to continue achieving high single-digit or even double-digit revenue growth, which will also strongly support profit performance. Joint-stock banks' performance will still be under pressure. Several joint-stock banks significantly increased and supplemented provisions in their interim reports, and the report judges that provisioning pressure will ease somewhat in the third-quarter reports, thereby solidifying the earnings bottom. The foundation for banks' continued improvement in the third-quarter reports is interest income, the elasticity is non-interest income, and the differentiation lies in asset quality. Since the beginning of the year, net interest income has completely reversed the year-on-year negative growth trend of 2023-2025, strongly supporting revenue recovery. From the third-quarter reports, it is expected that net interest income will still significantly contribute positively to revenue, but the marginal growth rate may slightly converge: Balance sheet expansion continued to slow in the third quarter, and subsequent focus can be placed on tracking how changes in policy expectations catalyze real economy demand. At the end of August, the growth rates of social financing and RMB loans were 7.2% and 4.9%, respectively, slowing by 0.2 and 0.3 pct from the end of June. Loan growth has fallen to the bottom range, and future loan growth decelerating while improving in quality will become the norm. Structurally, retail demand has not seen a substantive turning point, and against the backdrop of government-related projects being front-loaded at the beginning of the year, corporate lending momentum has also declined. It is worth noting that after the implementation of interest subsidy policies at the end of September, the activity level of the housing market in key cities has rebounded, which is expected to drive improvement in mortgages. At the same time, if the year-end Central Political Bureau meeting and Central Economic Work Conference provide more positive policy expectations, it cannot be ruled out that this will catalyze expectations of demand recovery. Against the backdrop of interest rates on various loan products gradually approaching 3%, the downward space for asset prices is relatively more limited (the central bank disclosed that the weighted average interest rate on newly issued corporate loans in August was slightly below 3%, and the weighted average interest rate on newly issued personal housing loans was stable at 3.1%); there is still room for improvement on the liability side. It is estimated that after large-scale time deposits mature in 2027-2028, there will be a cost reduction of more than 30bps. From the pace within the year, since the repricing of existing deposits is mainly concentrated in the first half, it is judged that the cost improvement in the second half will be less than in the first half. Listed banks' net interest margins may narrow slightly on the margin, but this will not change the full-year stabilization trend. It is expected that the year-on-year decline in listed banks' net interest margins in 2026 will narrow to only mid-single-digit basis points. When it comes down to different banks, banks that maintain relatively fast loan growth and have relatively considerable room for deposit cost improvement, achieving "volume growth with stable prices" (represented by city commercial banks with strong regional beta), as well as banks whose loan pricing has bottomed earlier and whose structural adjustment is basically in place (represented by state-owned large banks), will have more outstanding net interest income growth. Non-interest income may be the main reason for the continued revenue improvement of listed banks in the third-quarter reports, mainly because state-owned banks will likely recognize fair value changes from holding CXMT Corporation, while some small and medium-sized banks also have a low base in non-interest income for the same period. In 3Q26, the yield to maturity of 10-year government bonds was basically stable at 1.7%. From a base perspective, in 3Q25 the yield to maturity of 10-year government bonds rose unilaterally from about 1.6% to about 1.9%, resulting in a clearly low base for investment-related non-interest income at some small and medium-sized banks (in 3Q25, investment-related non-interest income of joint-stock banks, city commercial banks, and rural commercial banks fell 31%, 30%, and 14% year-on-year, respectively). In addition, according to the report's tracking, the increase in floating gains brought by CXMT Corporation's listing will be reflected in third-quarter revenue. Considering the liquidity discount for restricted shares (assuming a two-thirds discount), it is estimated that this will strongly boost the revenue growth of state-owned large banks in the first three quarters. On this basis, it is expected that revenue performance will also be smoothed by adjusting the pace of realizing financial market gains. It should be noted that for regional banks with a low base in intermediary business income last year (such as Bank Of Suzhou), quarterly recovery of intermediary business income within the year is more certain. However, the report also notes that in the third-quarter reports, some banks' intermediary business income may be affected by the regulatory notice "Notice on Matters Concerning Further Strengthening the Management of Bank Agency Channel Fees" (already implemented in July) and the weak equity market in the third quarter. It cannot be ruled out that this may cause short-term disruption to the incentive space of the bancassurance channel and agency sales performance. Asset quality will be the key to future performance differentiation among different banks. Since the beginning of the year, various banks have "almost unanimously" chosen to solidify asset quality during the window of revenue recovery, proactively exposing risks, reducing them in advance, and making sufficient provisions. The report believes that the book asset quality of listed banks is currently more authentic and can withstand cyclical tests. After the systemic risk expectations in the two key areas of real estate and local government financing platforms have completely collapsed, banks' credit costs will generally remain stable, which is conducive to stabilizing bank ROE. Going forward, what can create a gap between banks is, on the one hand, the pace of exposing existing non-performing loans and the thickness of provisions, and on the other hand, risk control management of potential risk assets (such as retail operating loans, online loans, etc.). It is expected that in 3Q26, listed banks' non-performing loan ratio and provision coverage ratio will remain basically flat quarter-on-quarter at 1.21% and 233%. Affected by non-performing retail loans, in 2Q26 listed banks' non-performing loan generation rate after adding back write-offs was about 0.9% (1Q26: 0.74%), but there was no larger-than-expected sharp increase. It is expected that retail loans will still undergo a phased risk exposure process within the year. Banks characterized by "low non-performing loan generation + high provision-to-loan ratio" have more buffer space for stabilizing risk and improving profitability. From this perspective, high-provision regional banks in high-quality areas most deserve valuation premiums. [Investment Recommendations] 2026 is a year with certain fundamental support for banks, and it is expected that the third-quarter reports of listed banks will continue the trend of "revenue improvement and steady profit growth." Combined with favorable catalysts such as multiple banks implementing interim dividends in the fourth quarter and patient capital expected to return, the bank sector is viewed favorably. At present, investors should continue to grasp high-quality city commercial banks and state-owned large banks with the strongest certainty of fundamental improvement, maintaining the judgment that "state-owned large banks will steadily raise the sector's valuation center, and high-quality city commercial banks will be the first to stand above 1x PB." However, the report additionally notes that investors can begin to focus on joint-stock banks at the lowest valuations, which are expected to solidify their earnings bottom within the year and benefit from real estate policy catalysts. When it comes down to individual stocks, A-shares continue to recommend growth-oriented city commercial banks with better fundamentals: Bank Of Suzhou (002966.SZ), Bank Of Hangzhou (600926.SH), Bank Of Chongqing (601963.SH), etc.; this year state-owned large banks have shown the most obvious marginal improvement in performance, laying the foundation for sector valuation repair, and Bank Of China (601988.SH), BANKCOMM (601328.SH), etc. are recommended. For joint-stock banks that can confirm their earnings bottom within the year, have prominent high-dividend advantages, and are heavyweight stocks, against the backdrop of continuously solidifying asset quality and improving prosperity in key housing markets, they are expected to usher in catch-up room next year. Focus on Industrial Bank (601166.SH), China Merchants Bank, CITIC BANK. H-share recommendations: Bank Of China (H), STANCHART, BOC HONG KONG. [Risk Warnings] Net interest margin stabilization below expectations; continued sluggish real economy demand, with economic recovery pace below expectations; real estate enterprise risk disturbances, and risk exposure of long-tail customer groups exceeding expectations.