Zhongtai: Banking sector performance marginally improves in 1-3Q26; stable asset quality highlights high-dividend advantage

Zhongtai released a research report stating that banking sector performance remained solid in 1-3Q26, with revenue up 8.1% YoY and net profit up 3.8% YoY, both growth rates improving marginally. The marginal improvement in performance was mainly driven by stable net interest margin and improvement in other non-interest income. Asset quality was also generally stable, with divergence within the sector and some individual banks increasing NPL exposure and disposal. The bank believes that the medium- to long-term ROE of banks is relatively certain, dividends are stable and yields attractive, and the certainty of earning returns from ROE and dividends is high. In the short term, there is a seesaw effect with technology, while medium- to long-term pricing returns to ROE and dividends. At the individual stock level, the bank focuses on recommending large banks with funding cost advantages and high-quality regional city and rural commercial banks. Zhongtai's main views are as follows: Revenue: 1-3Q26 revenue up 8.1% YoY (VS 1H26 revenue up 7.2% YoY). Stable scale growth provided the main performance driver, other non-interest income provided the main marginal improvement momentum, and stable net interest margin also contributed marginally. (1) By sector: large banks and city commercial banks still had higher revenue growth. All sectors maintained positive revenue growth in 1-3Q26 with marginal improvement. Large banks, joint-stock banks, city commercial banks, and rural commercial banks grew 10%, 3.6%, 8.8%, and 3.1% YoY respectively, with marginal changes of +0.8/+1/+0.7/+1.1 percentage points respectively. By attribution, the marginal improvement in large banks' revenue was mainly due to net interest margin and other non-interest income, while revenue improvement in other sectors was mainly due to other non-interest income. (2) By individual stock: most banks saw marginal recovery in 1-3Q26 revenue growth, among which those with QoQ growth improvement exceeding 4 percentage points included Qingnong, Qingdao, Huaxia, Chengdu, Zijin, Everbright, and Jiangsu. Profit: 1-3Q26 net profit up 3.8% YoY (vs 1H26 up 3% YoY), with revenue and cost contributions improving marginally. (1) By sector: large banks' profit growth continued to improve marginally, while city commercial banks slightly declined due to individual stock effects. Large banks, joint-stock banks, city commercial banks, and rural commercial banks grew 6.1%, -2.8%, 4.5%, and 3.9% YoY respectively; marginal changes in growth rates were: +1.7%, -0.2%, -2.8%, +0%. (2) By individual stock: in terms of absolute growth rates, those with growth above 8% included Qingdao (15.7%), Qilu (12.5%), Ningbo (12%), Chongqing (11.1%), Hangzhou (9.8%), Jiangsu (8.2%), Suzhou (8.1%), Nanjing (8%), and Changshu (8%). Those with QoQ profit growth improvement exceeding 1 percentage point included Xi'an, ICBC, ABC, Zhengzhou, Bank of Communications, CCB, Yuxi Rural Commercial Bank, and Jiangyin. 1-3Q26 net interest income up 8.3% YoY, with growth rate basically stable marginally; net interest margin basically flat YoY and QoQ, with asset yields and liability funding costs both down 2bp QoQ, with the declines narrowing. Interest-earning assets grew 7.4% YoY (VS 1H26 up 7.6% YoY), with scale growth slowing slightly. 1. NIM YoY: 1-3Q26 industry cumulative annualized net interest margin was 1.38%, basically maintained at this level since 3Q25. State-owned banks, joint-stock banks, city commercial banks, and rural commercial banks were 0bp, -2bp, 0bp, and -1bp YoY respectively. 2. NIM QoQ: 3Q26 industry single-quarter annualized net interest margin was 1.38%, flat QoQ. State-owned banks, joint-stock banks, city commercial banks, and rural commercial banks were +0bp, +0bp, +1bp, and -3bp QoQ respectively. Among them, industry asset yields and liability funding costs both declined 2bp QoQ, with the declines narrowing compared to the previous quarter. 3. By individual stock, those with net interest income growth above 15% included Nanjing, Chongqing, Suzhou, Chengdu, Xiamen, and Qingdao. 1-3Q26 industry overall non-interest income up 7.3% YoY (VS 1H26 up 4.2% YoY). Benefiting from a low base, better bond market performance in 3Q, and investment-related gains, the recovery in other non-interest income growth drove overall non-interest income performance. (1) Fee income down 1.6% YoY, with growth slowing marginally by 2.7 percentage points. (2) Other non-interest income up 17.2% YoY, with growth improving marginally by 9.7 percentage points. Asset quality breakdown analysis: generally stable, structural divergence continues. 1. NPL dimension: industry annualized NPL net formation rate for the first three quarters was 0.73%, up 7bp YoY. 3Q26 industry NPL ratio was 1.22%, flat QoQ, with divergent performance across sectors. State-owned banks were -1bp QoQ, joint-stock banks and city commercial banks were +1bp and +5bp QoQ respectively, and rural commercial banks were flat QoQ. 1H26 industry Stage 3 loans to NPL deviation was 104%, flat QoQ. 3Q26 sample listed banks' special mention loan ratio was 1.79%, up 8bp QoQ, with all sectors rising to varying degrees. 2. Provision dimension: 3Q26 industry provision coverage ratio and loan-to-provision ratio were 229.2% and 2.79% respectively, down 3.8 and 0.04 percentage points QoQ respectively. Other: 1. Expense aspect: 3Q26 listed banks' cost-to-income ratio was 28.2%, down 1.8 percentage points YoY, with all sectors declining. 2. Capital aspect: 3Q26 industry core tier-1 capital adequacy ratio and capital adequacy ratio were 11.43% and 16.42% respectively, up 0.07 and 0.15 percentage points QoQ respectively, further consolidating capital strength. Regarding convertible bonds, there are currently 4 outstanding convertible bonds among listed banks, among which Bank Of Chongqing is closest to the forced redemption price, with a gap of 5.42%; Changshu and Shanghai have gaps of 8.51% and 12.41% respectively, and Industrial Bank has a gap of 33.18%. Investment recommendation: 1. Banks' certain full-year performance will bring stable returns for bank stocks in 2026, with short-term performance related to market style; the economic development model will continue (strong policy resolve), strong corporate business and residents' persistent low risk appetite will drive NIM to bottom out and recover, and sustained revenue growth will be a highlight, with strong performance certainty. 2. Two main investment themes for bank stocks: First, city and rural commercial banks with regional advantages and strong certainty, in regions including Jiangsu, Shanghai, Chengdu-Chongqing, Shandong, and Fujian, with focus on recommending Bank Of Jiangsu (600919.SH), Bank of Ningbo (002142.SZ), Qilu Bank Co., Ltd. (601665.SH), Chongqing Rural Commercial Bank (601077.SH), Bank Of Hangzhou (600926.SH), and regional banks such as Nanjing, Chengdu, Qingdao, and Shanghai Rural Commercial Bank. Second, the high-dividend stability logic, with focus on recommending large banks: the six major banks and joint-stock banks including China Merchants Bank, CITIC Bank, and Industrial Bank. Risk warning: Financial regulation exceeding expectations; research report information not updated in a timely manner.