Orient Securities has released a research report stating that the banking sector is expected to return to fundamental narratives in 2026. As the first year of the 15th Five-Year Plan, asset expansion is projected to remain resilient with support from policy-based financial instruments. The sector is still within a cycle of concentrated deposit repricing, which is likely to support the stabilization and recovery of net interest margins. Additionally, structural risk exposures are anticipated to be cushioned by policy backing. In 2026, the insurance industry will systematically implement IFRS 9, and the medium-to-long-term guiding effects of new public fund assessment regulations are expected to materialize. The firm expresses optimism about the absolute returns of the banking sector in 2026. Two main investment themes are recommended: 1) High-quality small and medium-sized banks with stable fundamentals; and 2) Large state-owned banks characterized by robust fundamentals and strong defensive value. Key viewpoints from Orient Securities are outlined below.
What changes have occurred in the deposit-loan growth gap of banks over the past decade? 1) 2016–2018: The gap widened trend-wise, primarily due to a faster decline in deposit growth. The slowdown in corporate deposit growth was largely a spillover effect of deleveraging efforts, while fluctuations in non-bank deposit growth were influenced by significant volatility in the A-share market, stricter interbank regulations, and the implementation of new asset management rules. During this period, the gap between deposit growth and total social financing growth narrowed first, reflecting a shift of credit scale from off-balance-sheet to on-balance-sheet activities. 2) 2019–2020: The gap narrowed, driven initially by a sharper decline in loan growth due to tightened real estate market regulations and the ongoing effects of the transition period for new asset management rules. The latter half of the period was significantly impacted by the COVID-19 pandemic. 3) Second Half of 2021–2022: The gap narrowed sharply, driven by dual factors from both deposits and loans. The pandemic continued to suppress credit demand, particularly weakening the real estate sector, which accelerated the downward trend in credit growth. As housing prices peaked, the growth differential between household deposits and loans rapidly narrowed, turning positive and remaining in positive territory thereafter. This shift is viewed as a critical indicator of broad liquidity, signaling that the household sector has transitioned from being a liquidity demander to a liquidity supplier. 4) 2023–First Quarter of 2024: The gap widened again, mainly due to a faster decline in deposit growth. Contributing factors included intensified early mortgage repayments by households in 2023, the launch of a comprehensive debt resolution plan in the second half of 2023, which further impacted deposit creation, and a resurgence of deposit disintermediation in the latter half of the year.
How should the persistent narrowing of the deposit-loan growth gap in recent years be interpreted? 1) The cleanup of high-interest deposits has been accompanied by some balance sheet contraction. 2) Accelerated debt resolution has had a direct impact, with the scale of debt resolution reaching 3.2 trillion yuan in 2024. Starting in 2025, deposit and loan growth have begun to move in tandem—a rare occurrence. Two core drivers are identified: first, debt resolution combined with anti-internal competition has led to further evolution in the macro balance sheet, reflected in the structure of total social financing; second, changes in the asset allocation structure of non-bank institutions have seen wealth management products significantly increase their allocation to interbank deposits by 10.7 percentage points cumulatively since 2023, leading to more efficient回流 of disintermediated deposits back into banks’ balance sheets. The sharp jump in the deposit-loan growth differential in January 2026 is attributed to increased corporate foreign exchange settlement activities amid a appreciating Renminbi.
What is the outlook for the deposit-loan growth gap within the year? The gap is more likely to marginally dull rather than exhibit a trend of widening. The former considers the narrowing trade surplus in foreign exchange settlement and sales, as well as potential impacts of regulatory changes on non-bank asset allocation behavior. The latter is based on two considerations: 1) As long as the household sector’s role as a credit supplier does not undergo a trend change, the deposit-loan growth gap is more prone to narrowing than widening; and 2) After the test in January, there is increased confidence that deposit disintermediation will remain limited for the full year.
How is the deposit-loan growth gap related to banks’ bond allocation capacity? Intuitively, a narrowing deposit-loan growth gap indicates relative surplus deposits within the banking system, which should enhance banks’ capacity for bond allocation. This pattern is supported by statistical data. After excluding disruptions from government bond issuances during the central government’s leveraging process, it is observed that since 2022, changes in the deposit-loan growth gap have served as a relatively stable leading indicator for bank bond investment growth, particularly for large state-owned banks, with a lead time of about 2–3 months. The pattern is less pronounced for small and medium-sized banks, likely due to external regulatory constraints and accelerated mergers amid risk mitigation efforts.
Risk warnings include tighter-than-expected monetary policy, fiscal policy falling short of expectations, and calculation-related risks.