Chinese Banks Past Worst of Margin Squeeze, Daiwa Says in New Coverage

Daiwa has initiated coverage on Chinese banks with a positive rating, arguing that the industry has moved past the most challenging period for net interest margins (NIMs). The brokerage expects conditions are now in place for a modest but meaningful stabilization after three years of margin erosion and stagnant earnings.

Margin Pressure Eases

According to a research note from Daiwa, the Chinese banking industry's net interest margin has contracted by a cumulative 68 basis points since 2021. However, the firm projects that NIMs will stabilize at 1.40% to 1.41% between 2026 and 2027. This implies an annual narrowing of just 1 to 2 basis points, a sharp improvement from the 10 to 22 basis point annual declines seen from 2023 to 2025.

Daiwa attributes this shift from a headwind to a neutral factor to several developments:

• An estimated RMB 108 trillion in high-cost legacy deposits are set to mature this year, which is expected to lower funding costs.
• The repricing of approximately RMB 38 trillion in mortgages has been fully absorbed by the market.
• The People's Bank of China has paused its reductions of the loan prime rate (LPR).

Outlook on Asset Quality and Growth

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Daiwa views the sector's asset quality as manageable, noting that the non-performing loan (NPL) ratio for property-related debt peaked at 3.89% in 2023. The report states that most of the existing risks from this portfolio have already been provisioned for.

Looking ahead, the brokerage forecasts that Chinese banks will achieve revenue growth of 5% to 6% in the 2026 to 2027 period, marking a recovery from the recent period of stagnation.

Analyst Ratings and Valuation

In its initiation, Daiwa assigned a "Buy" rating to China Construction Bank (00939), an "Outperform" rating to China Merchants Bank (03968), and a "Hold" rating to the Industrial and Commercial Bank of China (ICBC) (01398).

The firm also highlighted the attractive valuations for the banks' H-shares, which offer dividend yields of 5% to 6%. This represents a premium of approximately 385 basis points over the yield on 10-year Chinese government bonds. Daiwa added that strong Core Tier 1 capital adequacy buffers of 300 to 400 basis points should help support shareholder payouts and share prices.