Net interest margin ceases to decline, with profit recovery imminent: under the combined effect of a risk-off market sentiment and expectations of improving fundamentals, is the banking sector once again entering a window for allocation?

Question

1. What happened? The rapid decline in commercial banks' net interest margin has come to an end.  ---------------------  2. After several years of a one-sided downward cycle, China's banking sector's net interest margin welcomed a historic stabilization turning point in 2025.  3. According to the latest regulatory indicators disclosed by the National Financial Supervision and Administration, the trend of commercial banks' net interest margin has transitioned from a previous "rapid decline" to a "bottoming" phase, showing strong resilience and structural differentiation characteristics.  4. From an overall trend perspective, the net interest margin of commercial banks for the full year of 2025 recorded 1.42%.  5. This figure not only remained absolutely flat compared to the first half of 2025 and the first three quarters but also achieved three consecutive quarters of horizontal stabilization,  6. significantly narrowing the year-on-year decline in net interest margin to 10.5 basis points (BP), showing a notable convergence compared to the decline in 2024.  7. Among them, the leading state-owned bank, Industrial and Commercial Bank of China, and the leading joint-stock bank, China Merchants Bank, saw their net interest margins increase by 4 BP and 3 BP, respectively, from Q3 2025 to Q4 2025.  8. The stability of industry net interest margin data signifies that the core negative factors suppressing the fundamentals of the banking sector are gradually becoming less acute.  9. From the structural characteristics of institutional types, the trajectory of net interest margin in the fourth quarter presents a clear differentiation pattern of "minor decline for state-owned banks, recovery for city and rural commercial banks,"  10. which essentially reflects the micro differences in the pace of cost reduction on the liability side and pricing ability on the asset side for different types of banks.  11. Looking ahead to 2026, with the continued release of the benefits from the repricing of high-interest deposits maturing in the previous period,  12. as well as the regulatory authorities' strong protection against irrational competition on the liability side, the downward channel for banks' liability costs remains broad.  13. Coupled with the convergence in the decline of asset-side yields under the "anti-involution" guidance,  14. the overall decline in industry net interest margin is expected to be extremely limited (most sell-side forecasts predict a narrowing decline to 0-5 BP, compared to a previous value of -10.5 BP),  15. with some institutions that have greater liability elasticity likely to achieve substantial stabilization and recovery first.  16. …

Net interest margin ceases to decline, with profit recovery imminent: under the combined effect of a risk-off market sentiment and expectations of improving fundamentals, is the banking sector once again entering a window for allocation?

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