According to a report released by Orient Securities Orient Securities Company Limited, the recent calculations suggest that the adjustments to the LPR in Q2 2025 and the decreases in deposit rates will likely have a neutral to mildly positive effect on the net interest margin of banks this year. Moreover, while the ongoing internal competition may suppress loan growth, it could also promote reasonable pricing for related loans. Thus, new loan interest rates are expected to remain relatively stable, providing support for net interest margins.

As uncertainties in the external environment rise again and market risk appetite experiences fluctuations, coupled with the increase in demand for insurance during the "opening red" period and potential profit-taking pressures from institutions resulting in shifts in asset allocation, the relative return of the banking sector in Q4 2025 is viewed positively. Orient Securities' key points are as follows:

1) Net interest margins are expected to stabilize, supporting stable interest income performance. It is predicted that credit growth in Q3 2025 will continue to face downward pressure, while financial investment remains a vital driver for asset expansion. Loan growth among A-share listed banks is expected to decline slightly by 0.03 percentage points compared to H1 2025, with state-owned banks remaining relatively robust and city commercial banks experiencing more significant declines. Government bond issuance may slow somewhat in Q3 2025; however, the essential driving role of financial investment on banks' asset expansion will not change, leading to a projected increase of 1.9 percentage points in financial investment growth for listed banks compared to H1 2025.

2) Net interest margins are set to stabilize, further improving growth in interest income. The calculations indicate that the adjustments to the LPR and deposit rates in Q2 2025 will have a neutral to positive effect on net interest margins. While loan growth pressure exists, reasonable pricing for relevant loans may have beneficial effects as well. New loan interest rates are expected to remain relatively strong, supporting net interest margins. Despite a slight cooling of interest-earning asset expansion, the outlook for interest income of listed banks in Q3 2025 is a year-on-year decrease of 0.8%, with a sequential increase of 0.5 percentage points: state-owned banks +0.8 percentage points, joint-stock banks -0.02 percentage points, city commercial banks -0.4 percentage points, and rural commercial banks -0.1 percentage points.

3) Non-interest income performance may show differentiation, with state-owned banks likely to perform better. Q3 2025 may see a notable imbalance between equity and debt, with substantial growth in equity fund products benefiting state-owned banks with stronger distribution capabilities for such products. Additionally, a trend of “deposit migration” from general deposits to interbank deposits is noticeable, where state-owned banks, being traditional custodians, will also benefit from increased custodian fee income. It is anticipated that the net income from fees for listed banks will grow by 3.4% year-on-year in Q3 2025, with a sequential increase of 0.4 percentage points; specifically, state-owned banks +0.3 percentage points, joint-stock banks +0.8 percentage points, city commercial banks -0.1 percentage points, and rural commercial banks -0.2 percentage points.

Asset quality is expected to remain resilient, and credit costs may shift back to a declining trend. Despite the ongoing trend of decreasing loan growth since the start of 2025, write-off growth has remained relatively steady, leading to a widening gap between the two. Continued positive loan write-offs are anticipated to support stable performance in non-performing loan indicators. Moreover, listed banks' active efforts to reduce the three-phase gap (balance of three-phase loans - balance of non-performing loans) have resulted in a reduction of approximately 26.5 billion yuan in the first half of 2025. This may exert some pressure on credit costs, but it is likely to lessen in the second half. Considering the revenue challenges and a weaker desire to cash in bonds compared to Q2 2025, banks may also be incentivized to lower credit costs. The projected impairment loss for listed banks in Q3 2025 is a year-on-year decrease of 1.2%, a sequential decrease of 2.6 percentage points, with net profit growth of 0.7% year-on-year and a sequential decline of 0.1%: state-owned banks +0.2 percentage points, joint-stock banks +0.1 percentage points, city commercial banks -1.6 percentage points, and rural commercial banks -1.3 percentage points.

Investment recommendations currently focus on two main lines: 1) High-quality small and medium-sized banks with solid fundamentals, including targeted stocks: Chongqing Rural Commercial Bank 渝农商行, Bank of Chongqing 重庆银行, Nanjing Bank 南京银行, and Hangzhou Bank 杭州银行. 2) State-owned large banks with robust fundamentals and good defensive value, including targeted stocks: Industrial and Commercial Bank of China 工商银行, China Construction Bank 建设银行, and Agricultural Bank of China 农业银行.

Risk warnings include potential tightening of monetary policy beyond expectations, insufficient fiscal policy implementation, and changes in assumptions affecting forecast results.