According to the financial news app, Dongfang Securities released a research report stating that, based on calculations, the reduction of the LPR in Q2 2025 and the decrease in the deposit benchmark interest rate have a neutral to positive impact on the net interest margin of banks for the year. At the same time, the advancement of anti-involution has suppressed loan growth, but it may also have a positive effect on the reasonable pricing of related loans. Therefore, it is expected that the interest rates on newly issued loans during this period may remain relatively firm, providing support for the net interest margin. With the increase in external environmental uncertainties, market risk appetite has temporarily declined, coupled with the increased demand for dividend allocation as insurance enters the "opening red" phase, as well as the potential profit-taking demands from institutions leading to allocation switching opportunities, the relative returns of the banking sector in Q4 2025 are optimistic.

The main points of Dongfang Securities are as follows:

Net interest margin may stabilize, supporting stable performance of net interest income

1) Credit growth in Q3 2025 still faces downward pressure, and financial investment remains an important driving force for asset expansion. It is expected that the loan growth rate of A-share listed banks in Q3 2025 will slightly decrease by 0.03 percentage points compared to H1 2025, with state-owned banks remaining relatively firm, while city and rural commercial banks experiencing a more significant decline. The issuance of government bonds in Q3 2025 has slightly slowed down, but this does not change the key driving role of financial investment in the asset expansion of banks. It is expected that the growth rate of financial investment for listed banks in Q3 2025 will increase by 1.9 percentage points compared to H1 2025.

2) Net interest margin is expected to stabilize, driving the growth rate of net interest income to continue improving. According to calculations, the reduction of the LPR in Q2 2025 and the decrease in the deposit benchmark interest rate have a neutral to positive impact on the net interest margin of banks for the year. At the same time, the advancement of anti-involution has suppressed loan growth, but it may also have a positive effect on the reasonable pricing of related loans. Therefore, it is expected that the interest rates on newly issued loans during this period may remain relatively firm, providing support for the net interest margin. In an environment of slightly cooling interest-earning asset expansion and firm interest margins, it is predicted that the year-on-year growth rate of net interest income for listed banks in Q3 2025 will be -0.8%, with a quarter-on-quarter increase of 0.5 percentage points. Among them, state-owned banks/shareholding banks/city commercial banks/rural commercial banks are expected to be +0.8 percentage points/-0.02 percentage points/-0.4 percentage points/-0.1 percentage points respectively.

Non-interest income performance may show differentiation, with state-owned banks performing better

1) The stock-bond seesaw effect is prominent in Q3 2025, with considerable growth in the scale of equity fund products, which is relatively favorable for state-owned banks with stronger distribution capabilities for such products. In addition, there has been a "deposit migration" in Q3 2025, reflected in the conversion of general deposits to interbank deposits. As traditional custodians, state-owned banks also benefit from custodial fee income. It is predicted that the year-on-year growth rate of net fee income for listed banks in Q3 2025 will be 3.4%, with a quarter-on-quarter increase of 0.4 percentage points. Among them, state-owned banks/shareholding banks/city commercial banks/rural commercial banks are expected to be +0.3 percentage points/+0.8 percentage points/-0.1 percentage points/-0.2 percentage points respectively.

2) Other non-interest income in Q3 2025 is generally under pressure, but differences in financial investment structures may lead to better performance of other non-interest income for state-owned banks. First, the proportion of TPL is relatively low; second, the proportion of AC is relatively high and has a longer duration, providing considerable realization space; third, during the last round of supply-side reform, state-owned banks carried a significant amount of debt-to-equity swap assets, which may contribute to other non-interest income in Q3 2025. It is predicted that the year-on-year growth rate of other non-interest income for listed banks in Q3 2025 will be 7.1%, with a quarter-on-quarter decrease of 3.7 percentage points, and the year-on-year revenue growth rate will be 0.9%, with a quarter-on-quarter decrease of 0.2 percentage points. Among them, state-owned banks/shareholding banks/city commercial banks/rural commercial banks are expected to be +0.3 percentage points/-0.7 percentage points/-1.5 percentage points/-1.2 percentage points respectively Asset quality may remain stable, and credit costs may return to a downward range

On one hand, despite the trend of declining loan growth since 2025, the growth rate of write-offs has remained quite robust, leading to a widening gap between the two; proactive write-offs of non-performing loans are expected to continue supporting the stable performance of non-performing indicators. On the other hand, in the first half of 2025, listed banks actively promoted the reduction of the three-stage gap (loan three-stage balance - non-performing loan balance), collectively reducing it by about 26.5 billion yuan. This process may put some pressure on credit costs, which may weaken in the second half of 2025. Additionally, considering the pressure on the revenue side and the demand for bond redemption may be weaker than in the second quarter of 2025, it is speculated that banks also have the motivation to reduce credit costs.

It is predicted that in the third quarter of 2025, listed banks will report a year-on-year growth rate of impairment losses of -1.2% and a quarter-on-quarter decrease of 2.6 percentage points, with a net profit growth rate attributable to shareholders of 0.7% and a quarter-on-quarter decrease of 0.1 percentage points, among which state-owned banks/shareholding banks/urban commercial banks/rural commercial banks will be +0.2 percentage points/+0.1 percentage points/-1.6 percentage points/-1.3 percentage points respectively.

Investment Recommendations

Currently, focus on two investment main lines: 1) High-quality small and medium-sized banks with confirmed fundamentals, related targets: Chongqing Rural Commercial Bank (601077.SH), Bank of Chongqing (601963.SH), Bank of Nanjing (601009.SH), HZBANK (600926.SH). 2) Large state-owned banks with stable fundamentals and good defensive value, related targets: Industrial and Commercial Bank of China (601398.SH), China Construction Bank (601939.SH), Agricultural Bank of China (601288.SH).

Risk Warning

Monetary policy tightening beyond expectations; fiscal policy falling short of expectations; changes in assumptions affecting calculation results