Orient: How should we outlook the net interest margin trend for 2027?

Orient released a research report stating that the banking sector is expected to return to fundamental narratives in 2026: given that banks remain in a concentrated deposit repricing cycle, this supports net interest margin stabilization and recovery; structural risk exposure still awaits policy support, and banking sector revenue is expected to continue improving in 2026-27. Meanwhile, considering that the reduction pressure from the stabilization fund's holdings in bank stocks has significantly eased, the rebalancing of market risk appetite and style helps raise the probability of banks achieving relative returns on a basis. Two main themes are recommended: 1. State-owned large banks with solid fundamentals and good defensive value. 2. High-quality small and medium-sized banks with confirmed fundamentals. Orient's main views are as follows: Core Views Net interest margin is expected to continue stabilizing in 2026, primarily due to the mismatch in repricing between assets and liabilities. After the rate cut cycle began in 2022, loans repriced annually with LPR, and asset yields declined first; liability-side cost improvement emerged from 2023, and by the first three quarters of 2026, asset and liability yields declined synchronously by 25bp, with the decline on both ends basically flat. In addition, there are two major upside supports: First, self-discipline constraints on credit pricing and banks' shift in operational focus from scale expansion to efficiency priority mean that new loan rates have basically stopped falling, the yield spread between existing and new loans continues to converge, and the drag from new deployment on existing asset yields weakens; Second, increased regulatory oversight of interbank liabilities brings incremental benefitsthe interbank deposit self-discipline mechanism at end-2024 and interbank self-discipline 2.0 in 2026 were successively implemented, driving interbank liability costs down by 49bp and 23bp in 2025 and 2026H1 respectively, with improvement exceeding prior market expectations. How to outlook the net interest margin trend for 2027? 1. The cost improvement dividend on the liability side will significantly diminish, with the deposit repricing contribution falling back to about 40% of 2026 levels. (1) Deposits: On one hand, the scale of high-interest time deposit maturities shrinks substantially: it is estimated that time deposit maturities in 2027 will be RMB118 trillion, an increase of RMB4 trillion year-on-year, mainly due to natural growth in the deposit base driving up total maturities, but among which maturities of high-interest deposits with terms of 2 years or more will be about RMB21 trillion, a decrease of RMB10.4 trillion year-on-year. On the other hand, the repricing magnitude of deposits across tenors declines: it is estimated that the net interest margin boost from full-year deposit cost decline is about 8bp, with the repricing dividend about 40% of 2026. In terms of pace, 60% is concentrated in 27Q1 maturities, and the liability dividend will basically be fully realized in the first half of the year. (2) Interbank liabilities: The Financial Street Holdings forum mentioned a change in the anchor for policy rates, with limited impact on net interest margin and possibly a small short-term benefit. If the policy rate is cut by 15bp, interbank demand deposit rates are expected to follow downward first, which is estimated to bring about 0.7bp of net interest margin support; if interbank time deposit rates subsequently decline in tandem, combined with linked declines in NCD rates, the contribution to net interest margin could approach 2bp. 2. On the asset side, loan rates still face downward pressure, but further downside space is already limited. (1) Loans: In an environment of weak credit demand, to maintain credit growth, new loan pricing is expected to remain under pressure. Back-calculated from the 10-year government bond yield, the loan pricing floor estimated for 26H1 is 2.56%, only 19bp apart from the existing loan yield of state-owned large banks. If it is further assumed that the reasonable lower limit for the 10Y government bond yield is 1.6%, then the gap between the loan pricing floor and existing loan yields is only about 30bp, and the downside space has significantly narrowed. (2) Financial market investment: The impact from declining bond investment returns is also controllable. AC and FVOCI accounts are only repriced when bonds mature and are reinvested; the duration of banks' AC+OCI portfolio is about 5 years, meaning about 20% matures and is reallocated each year, plus about 10% new allocation, so only 30% of bonds face yield reductions for the full year. Assuming financial market investment yields decline by 15bp, this is estimated to drag net interest margin by about 4bp. (3) Conclusion of replacement bonds: The issuance of RMB6 trillion replacement bonds has concluded, and the situation of high-interest loans being replaced by low-interest bonds will no longer persist, expected to bring about 0.6bp of small positive support. 3. Under neutral assumptions, the net interest margin narrowing in 2027 is about 3.3BP. Under a neutral scenario where the economy, monetary policy, and loan pricing regulation remain stable, assuming loan yields decline by 15bp in 2027, combined with the comprehensive impact of deposits, interbank liabilities, bond allocation and other factors, the full-year net interest margin narrowing for the industry is estimated at about 3.3bp. Risk Warnings Monetary policy tightening beyond expectations; fiscal policy falling short of expectations; risks related to estimates.