BofA Securities: Chinese banks' Q3 earnings improved on investment gains, but further upside is limited

BofA Securities released a research report stating that Chinese banks' third-quarter earnings improved on the back of investment gains, but the room left for future buffers has diminished, and after the sector's recent rise to historical highs, the firm believes absolute upside is limited. H-share banks' third-quarter net profit growth improved from a 0.5% year-on-year rise in the first half to a 1% rise in the first nine months, while pre-provision operating profit growth accelerated from 9.1% to 10.2%. Agricultural Bank Of China (01288), China Construction Bank Corporation (00939) led the state-owned major banks with profit growth of 7.1% and 6.6% year-on-year, partly supported by investment income, while Postal Savings Bank Of China (01658) and Bank Of China (03988) lagged relatively. First-nine-month pre-provision operating profit and net profit averaged 80% to 81% of the firm's full-year 2026 forecasts, with most banks progressing normally. The firm noted that the sector has risen 23.7% year-to-date, outperforming the MSCI China and H-share financials indices by 43 percentage points and 21 percentage points, respectively. On October 22, the firm downgraded BANKCOMM (03328) H-shares and Bank Of China (601988.SH) A-shares to "Underperform," reflecting concerns over slower growth in 2027, declining dividend yields and increasingly crowded positioning. Although Chinese banks should remain relatively resilient in a market downturn, Agricultural Bank Of China, China Construction Bank Corporation and Industrial and Commercial Bank of China (01398) remain the top picks among large banks. The firm also noted that average loan growth rose 5.2% year-on-year in the first nine months, with the six major state-owned banks continuing to lead at 5.8% to 7.9% year-on-year growth, though third-quarter new loans relied heavily on discounted bills; loans at some joint-stock banks and regional banks contracted 0% to 1% quarter-on-quarter. The average net interest margin fell another 1 basis point quarter-on-quarter to 1.43% in the third quarter and is expected to come under further pressure in the coming quarters. Fee income growth slowed from a 0.9% year-on-year rise in the first half to a 1.7% decline in the first nine months, while other non-interest income, mainly driven by trading and revaluation gains, rose 17% year-on-year in the first nine months. The average non-performing loan ratio held steady at 1.24% quarter-on-quarter, but the provision coverage ratio and loan provision ratio both declined quarter-on-quarter and year-on-year.