Morgan Stanley: The profitability of domestic banks shows a rebound trend in the third quarter, with Agricultural Bank of China performing better than its peers

According to the Zhitong Finance APP, Morgan Stanley released a research report stating that regarding the performance of domestic bank stocks in the third quarter of this year, although investment income has declined, more domestic banks reported improvements in net interest income growth and healthy growth in fee income. Most state-owned banks saw profit growth in the third quarter of 2025 surpassing that of the first half of the year, benefiting from stable asset quality. Ningbo Bank (002142.SZ) and Agricultural Bank of China (01288) outperformed their peers.

The report indicated that although state-owned banks and China Merchants Bank (03968) still face some pressure on net interest margins, most of the joint-stock banks covered by the report reported a rebound in net interest margins in the third quarter of 2025, thanks to lower funding costs and more prudent loan growth and pricing, which supported net interest income growth. China Minsheng Bank (01988) and SPD Bank (600000.SH) not only achieved a quarter-on-quarter rebound in net interest margins but also improved year-on-year net interest margins, as both banks have focused on risk digestion and improving their customer base in recent years rather than merely pursuing scale growth. Ningbo Bank maintained the highest net interest income growth within the coverage, benefiting from increased market share and significantly lower net interest margin pressure compared to peers.

Morgan Stanley pointed out that the pressure on net interest margins for state-owned banks continues to exist, partly due to the low-yield bond investments and high growth in bills in the third quarter of this year, but most banks expect the pressure on net interest margins to further ease. More domestic banks reported healthy growth in fee income in the third quarter of 2025, although revenue and pre-provision operating profit (PPOP) growth was dragged down by declining investment income: the average year-on-year growth in fee income rebounded from 1.4% in the second quarter of 2025 to 11.1%, with more covered domestic banks reporting improvements in fee income growth, benefiting from a recovery in capital market activities and continued strong insurance sales, especially after the impact of reduced agency business rates has passed. Ningbo Bank led with a year-on-year fee income growth of 94%; Agricultural Bank of China maintained a year-on-year growth of 23.6%, continuing to perform well after exceeding 30% year-on-year growth in the second quarter.

Morgan Stanley stated that although the income and PPOP growth of the covered domestic banks slowed compared to the second quarter, mainly due to the decline in investment income (due to rising bond yields), the bank believes that the rebound in bond yields and improvements in core operating trends are more favorable for the long-term growth and valuation of domestic banks. Contrary to industry trends, Agricultural Bank of China and Bank of Communications (03328) reported higher investment income, revenue, and PPOP, demonstrating good investment capabilities.

Morgan Stanley noted that asset quality remained stable in the third quarter of 2025, with most banks experiencing a decline in credit costs: the average non-performing loan ratio of the covered domestic banks remained flat at 1.15%. Although state-owned banks slightly reduced credit costs to support profit growth, the non-performing loan coverage ratio only slightly decreased to a still high level of 263%.

Overall, domestic banks continued to show a trend of profit rebound in the third quarter of 2025: the profit rebound of state-owned banks accelerated to mid-single digits in the third quarter, benefiting from further declines in credit costs; meanwhile, there was greater differentiation in performance between joint-stock banks and local banks