Zhongtai Securities has released a fresh research report indicating that the sector's consistent earnings delivery is poised to generate solid returns for banking stocks throughout 2026, with short-term performance remaining tethered to prevailing market dynamics. The brokerage suggests that the current economic development paradigm is set to persist, underpinned by strong policy resolve, which together with robust corporate lending activity and persistently conservative household risk appetites, will drive net interest margins toward a cyclical bottom and subsequent recovery. Consequently, revenue growth is expected to remain a standout metric, reinforcing the sector's earnings predictability.
The investment framework for bank equities rests on two core pillars. The first highlights regional city and rural commercial banks that possess distinct competitive advantages and high earnings visibility, particularly those operating in areas such as Jiangsu, Shanghai, the Chengdu-Chongqing economic zone, Shandong, and Fujian provinces. The second pillar revolves around the high-dividend stability trade, with a strong preference for the six major state-owned lenders, including ABC (01288), CCB (00939), and ICBC (01398). Furthermore, the strategy extends to select joint-stock banks such as CM Bank (03968), Industrial Bank Co., Ltd. (601166.SH), and CITIC BANK (00998).
One of the primary takeaways from the report is that stabilizing net interest margins at major banks, complemented by prudent balance sheet expansion, is setting the stage for improved earnings trajectories. Asset quality remains sound, dividend payouts are on the rise, and the appeal of these stocks as dividend plays is becoming increasingly pronounced.
Projections for the first half of 2026 indicate that major banks will achieve a 9.2% year-on-year increase in operating revenue, a slight acceleration from the 8.7% growth recorded in the first quarter, largely attributed to the stabilizing margin environment. Net profit is forecast to rise 4.4% year-on-year, up from 3.6% in 1Q26, with essentially all of the six largest banks expected to show sequential improvement in profit growth. The sector's non-performing loan ratio is expected to hold steady quarter-on-quarter at 1.25%, while provision coverage is set to strengthen by 1.06 percentage points to 233.84%, further enhancing the safety cushion. The average dividend payout ratio for these major banks is expected to reach 32.4% in 1H26, marking a 0.6 percentage point increase year-on-year.
Regarding the drivers behind the revenue growth forecast, scale expansion will continue to provide the most significant absolute contribution. However, from a marginal perspective, the improvement in net interest margin will be the largest positive contributor, with its negative impact narrowing by 2% on a marginal basis. This is followed by a broader positive contribution from other non-interest income, which is expected to widen by 0.4%. Conversely, the positive contribution from scale growth is seen narrowing by -0.7%, while the drag from net fee income is projected to widen by -1.3%.
An analysis of net profit drivers suggests that provisions will provide the most substantial marginal support. The negative contribution from provisioning is expected to narrow by 3.9% on a marginal basis, followed by a 0.5% widening in the positive contribution from net interest margin and other non-interest income in supporting revenue. Cost efficiency is also set to improve, adding a marginal 0.3%, while deferred tax items are anticipated to swing from a positive to a negative contribution of -3.4% due to base effects.
A detailed breakdown of net interest income shows a projected 9.0% year-on-year growth in 1H26, up from 7.7% in the first quarter. This is supported by an 8.0% year-on-year increase in interest-earning assets, although this represents a deceleration of 1.4 percentage points from 1Q26. The cumulative annualized net interest margin is expected to be 1.31%, a 1bp improvement from the first quarter, with the year-on-year decline narrowing to just -1bp. The yield on interest-earning assets is set to fall 26bp year-on-year, while the cost of interest-bearing liabilities is expected to drop 28bp. Among individual banks, net interest income growth is led by ABC at +10.5%, followed by Bank of China at +10.2%, ICBC at +8.8%, Bank of Communications at +8.6%, CCB at +8.5%, and Postal Savings Bank of China at +5.8%.
On a sequential basis, net interest income for major banks is expected to grow 3.3% in 2Q26, following a 4.3% increase in the first quarter. This is driven by a 1.5% quarter-on-quarter rise in interest-earning assets and a 1bp improvement in the annualized net interest margin to 1.31%. This comes as asset yields are projected to dip 5bp quarter-on-quarter, while liability costs are expected to decline by a more substantial 7bp.
Net non-interest income is forecast to remain broadly stable with a 9.7% year-on-year increase. However, fee income is expected to face some pressure, with growth decelerating by 6.6 percentage points from the first quarter to -0.3%, causing fees to slip to 13.9% of total revenue. Other non-interest income is poised for robust expansion, with a projected year-on-year surge of 25.5%.
The report also underscores the stability of overall asset quality. The NPL ratio for major banks is expected to remain flat quarter-on-quarter and edge down 1bp from year-end. In the first half of the year, ICBC and CCB are each expected to see their NPL ratios improve by 2bp quarter-on-quarter, while ABC and Bank of Communications hold steady. The annualized NPL formation rate is projected at 0.63%, up 1bp quarter-on-quarter and 6bp year-on-year, though Bank of China is expected to show a notable 14bp year-on-year decline. The special-mention loan ratio is set to increase 2bp to 1.67% from end-2025, with Bank of China improving by 3bp and ABC remaining broadly flat. The overdue loan ratio is forecast to increase 6bp quarter-on-quarter to 1.41%, although ABC is seen improving by 1bp to 1.24%.
Asset quality dynamics continue to diverge by segment. While corporate NPL ratios are on a steady downward path, retail banking is still in an exposure cycle. In 1H26, the aggregate NPL ratio for corporate loans among the six largest banks is expected to be 1.22%, an 8bp improvement from the end of the previous year. In contrast, the retail NPL ratio is likely to rise 16bp to 1.48%. Specific corporate sectors show encouraging trends, with NPL ratios falling for leasing and commercial services (-13bp), manufacturing (-14bp), and wholesale and retail (-15bp), while the real estate sector faces upward pressure (+6bp). All retail sub-segments, including mortgages (+15bp), credit cards (+36bp), and business loans (+10bp), are projected to experience higher NPL ratios.
Finally, the bank’s capital position remains solid, despite a slight 6bp dip in the core tier-1 capital adequacy ratio for major banks to 12.27%. On the shareholder return front, the average dividend payout ratio is set to increase by 0.6 percentage points to 32.4%. With an average dividend yield of 4.23% expected for 2025 and a projected 4.18% for 2026, the sector's appeal as a source of stable, high dividends remains compelling.
Key risks to the forecast include a more severe than expected economic downturn, potential delays in data availability, and the possibility of estimation errors in the analysis.