China's banking industry: Net interest margin and ROE continue to decline, but asset quality is stable, cross-regional comparison is the key (J.P. Morgan)
J.P.
J.P. Morgan's basic research report explains in detail bank balance sheet analysis and key indicator algorithms such as net interest margin and cost-to-income ratio through sample financial statements. Key data show that from 2017 to 2025, the net interest margin and ROE of China's banking industry continued to decline, but asset quality remained stable. In contrast, the profitability and risk characteristics of the rest of the Asia-Pacific region vary significantly. The logic behind the report is that China's banking industry is undergoing a transformation of its profit model, shifting from high interest margin driven to refined operations. The market is fully aware of this long-term trend, and existing valuations may have partially reflected earnings pressure. The potential trading implication is that investors should establish a multi-dimensional ratio and cross-region comparison framework to evaluate bank fundamentals, rather than simply looking at PE/PB. One-sentence conclusion: The downward trend in profits of China's banking industry has not changed, but asset quality is stable and needs to be carefully screened through cross-regional and multi-dimensional indicators. The overall beta opportunities in the industry are limited. Positive/negative: negative for the overall Chinese banking industry. The current valuation of the sector has reflected the pessimistic expectations of narrowing net interest margins, but the continued decline in ROE has not fully priced in, especially for some small and medium-sized banks. Catalysts: 1) China's LPR and deposit interest rate adjustments; 2) Interim performance reports of various banks, focusing on changes in net interest margin, mid-term income, and asset quality; 3) Macroeconomic data, especially the impact of real estate and infrastructure investment on credit demand.