Orient: Net interest income supports Q1 bank revenue rebound, actively increasing provisions to dispose of risks.

Orient releases research report, stating that the banking sector is expected to return to a fundamental narrative by 2026: in the first year of the 15th Five-Year Plan, asset expansion still has resilience with the support of policy financial instruments; it is still in a cycle of deposit concentration and repricing, and the stable net interest margin is expected to rebound; while structural risks are still exposed, there is hope for policy support. In 2026, the insurance industry will systematically implement I9, and the medium- to long-term guiding effects of the public offering evaluation rules are expected to become apparent, with the sector seeing promising absolute returns in 2026. The recommendation is to focus on two main lines: 1. state-owned large banks with stable fundamentals and good defensive value; 2. high-quality medium-sized banks with confirmed fundamentals. Key points from Orient are as follows: Net interest income supports revenue rebound, improving profit margins As of Q1 2026, listed banks' revenue, PPOP, and net profit attributable to shareholders have increased year-on-year by +7.6%/+9.8%/+3.0%, respectively, compared to 2025, rising by 6.2pct/9.0pct/1.6pct. Specifically, the net interest income growth rate is +7.2% compared to 2025, with the drag from interest spread significantly reduced; fee income growth rate is -0.3pct compared to 2025; other non-interest income growth rate is +8.2% compared to 2025, with a strong bond market, significant increase in fair value changes, and noticeable restraint in profit realization. With a significant improvement in revenue, banks have generally increased provision (especially state-owned large banks), with varying degrees of improvement in PPOP and net profit attributable to shareholders. When looking at sub-sectors, the improvement in revenue of state-owned banks driven by net interest income has the greatest elasticity; the profit growth rate of joint-stock banks has not turned positive yet, with a slight decrease and relatively weaker performance; city commercial banks maintain good growth, with city commercial banks in the Jiangsu-Zhejiang and Shandong regions showing promising performance; the improvement in performance of rural commercial banks is generally modest. Balance sheet expansion continues to slow down, with strong growth in financial investments As of Q1 2026, interest-bearing assets grew -0.4% from 2025. The loan growth rate was relatively weak, compared to 2025 -0.3%, affected by factors such as total demand weakening, soft consumer credit policy environment, exposure of risks in key areas, and active confirmation, leading to a further decline in the proportion of retail credit; bond allocation strength continued to increase, with financial investments maintaining a strong growth rate, up +0.6% from the end of 2025, with state-owned banks further increasing allocation in A-share companies and medium-sized banks relatively increasing allocation in OCI. When looking at sub-sectors, the loan growth rate of state-owned banks has generally declined, while financial investment growth rate has increased by +1.5%; the absolute loan growth rate of joint-stock banks is weaker, but the marginal performance is stable, with an increase in loans in Q1 2026 compared to the previous year; asset expansion of city commercial banks has slowed down significantly, with loan/financial investment growth rates of -1.1%/-2.0%; while loan and financial investment growth rates of rural commercial banks have rebounded, with another sub-sector achieving an increase in loans compared to the previous year. On the liability side, overall deposit growth remains stable, with state-owned banks experiencing the least decline in deposit growth rate; banks' willingness to issue negotiable certificates of deposit is weak, with the growth rate of bonds payable compared to 2025 -12.6%, and for state-owned banks, the growth rate is even more significant at -23.0%. The net interest margin decreased slightly by -1BP compared to 2025, with some individual stocks rebounding strongly as the decline on the asset side significantly narrows The net interest margin in Q1 2026 was calculated at 1.32%, down -1BP from 2025, continuing the trend of stabilization. The improvement in funding costs provided important support, with the cost of interest-bearing liabilities down -21BP from 2025, showing a narrower improvement compared to the previous year by 6BP; the return on interest-earning assets decreased by 19BP from 2025, with a significant convergence of decline compared to the previous year by 14BP. With the gradual weakening of the effect of deposit repricing, the improvement in funding costs on the liability side may decrease marginally, while the trend of the return on asset side is expected to stabilize gradually, providing a solid foundation for a longer-term stabilization of the net interest margin. Looking at different sub-sectors, rural commercial banks benefited from the improvement in funding costs, with the largest marginal improvement in net interest margin, and state-owned banks showed a better narrowing of decline in the return on interest-earning assets in Q1 compared to the beginning of the year, outperforming other sub-sectors. Potential pressure on asset quality remains, with active provision increase and risk disposal As of Q1 2026, the non-performing loan ratio increased by 1bp from the end of 2025 and the watch list ratio increased by +3BP from the beginning of the year, with the estimated net non-performing loan generation rate increasing by +66BP year-on-year, indicating a certain upward pressure on asset quality. The improvement in non-performing loan ratio relies on active non-performing loan disposal, with the disclosed non-performing loan write-off amounts in 2025 and estimated in Q1 2026 increasing by +6%/+24% respectively compared to the previous year. Looking at different sub-sectors, joint-stock banks had the smallest increase in net non-performing loans. In terms of areas, both the real estate and consumer credit non-performing loan ratios increased. The significant deepening of the credit cost below the net non-performing loan generation rate in Q1 2026 suggests a weakening in the profitability support from provisioning, and considering the significant increase in credit costs while the provision-to-loan ratio decreased compared to the beginning of the year, banks may have engaged in more active risk disposal. Risk warnings Unexpected tightening of monetary policy; fiscal policy not meeting expectations; assumptions changes may affect the estimated results.