China banks' 2Q26 results are expected to remain resilient, with H-share state-owned major banks preferred

Overview

The report previews China banks' 2Q26 results and concludes that the banking sector retains defensive allocation value, supported by rotation into high-dividend assets and resilient operating fundamentals. The MSCI China Banks Index has rebounded 10% from its early-July low, and allocation to high-dividend stocks is expected to continue.

Core views

Banking-sector earnings growth is expected to improve in the second quarter, driven primarily by stabilizing net interest margins and non-interest income from wealth-management product sales and bond trading. State-owned major banks are expected to outperform smaller banks overall. Bank of China is supported by cross-border fee income and export momentum, while Agricultural Bank of China is supported by strong non-interest income. On a 12-month view, the report favors state-owned banks with stronger corporate banking capabilities while remaining relatively cautious on retail-driven banks.

Analysis framework

The report combines earnings forecasts for covered banks, trends in net interest margins and balance sheets, assessments of asset quality and credit costs, and comparisons of the valuation appeal of A-share and H-share banks based on 12-month forward price-to-book ratios, dividend yields, and ROE relationships.

Methodology notes

• Valuation methods12-month Forward Price-to-Book Ratio

  Price-to-book valuation range

  Compares the valuation levels of H-share and A-share banks using 12-month forward price-to-book ratios, while incorporating ROE to assess the alignment between valuation and profitability.

• ReturnTotal Shareholder Return

  Target-price change and dividend yield

  The report's Buy, Hold, and Sell definitions are based on 12-month total shareholder return, including the change in share price to the target price and expected dividend yield.

• FundamentalsBank Earnings Breakdown

  Net interest income, non-interest income, pre-provision profit, and impairment

  Earnings performance and provisioning capacity are assessed jointly through net interest margin, loan growth, fee and trading income, pre-provision profit, and impairment losses.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Construction Bank (0939.HK)

  One of the report's top picks and listed as Buy on the cover page.

  Strengths

  Its status as a state-owned major bank, corporate banking franchise, and advantages in high dividends and H-share valuation.

  Weaknesses

  Weak overall credit demand and declining net interest margins continue to limit earnings upside.

  Comparison

  Compared with retail-driven banks, it benefits more from corporate credit and fiscally related demand; compared with A-share banks, its H-share valuation and dividend yield are more attractive.

  Risks

  Renewed pressure on net interest margins, slowing macroeconomic activity, deteriorating asset quality, and rising provisioning needs.

• Bank of China (3988.HK)

  One of the report's top picks.

  Strengths

  Resilient cross-border fee income and support from export momentum.

  Weaknesses

  The banking sector as a whole still faces declining loan rates and a high base for non-interest trading income.

  Comparison

  Expected to lead profit growth among state-owned banks alongside Agricultural Bank of China; compared with retail-driven banks, it has relatively lower exposure to consumer-loan and credit-card risks.

  Risks

  Weaker foreign-trade momentum, net interest margin compression, macroeconomic slowdown, and asset-quality risks.

• H-share bank sector

  The report's preferred allocation direction.

  Strengths

  Higher dividend yields, relatively attractive valuations, and potential net capital inflows from domestic and overseas markets.

  Weaknesses

  Overall earnings growth remains limited and constrained by slower loan growth and margin pressure.

  Comparison

  Relative to A-share banks, the report views H-share banks as superior in dividend yield and valuation.

  Risks

  Changes in overseas investor risk appetite, valuation rerating falling short of expectations, and currency and market-liquidity volatility.

Key data

• Forecast sector growth in net profit attributable to shareholders in 2Q264% year on yearAbove 3% year-on-year growth in 1Q26.
• Forecast sector revenue growth in 2Q265% year on yearGrowth is slower than in 1Q26 due to a high base in 2Q25.
• Forecast sector pre-provision profit growth in 2Q266% year on yearSolid pre-provision profit growth helps strengthen provisioning buffers.
• Forecast growth in net interest income for covered banks7% year on yearExpected to be broadly flat quarter on quarter.
• Forecast quarter-on-quarter change in net interest margin-3 basis pointsBelow the 4-basis-point quarter-on-quarter expansion recorded in 1Q26.
• Interest rate on newly issued corporate loans3.04%Down 2 basis points quarter on quarter in 2Q26.
• Interest rate on newly issued mortgage loans3.05%Down 1 basis point quarter on quarter in 2Q26.
• Cost of new term deposits12.8%Down 3 basis points quarter on quarter in 2Q26; the benefit from deposit repricing is expected to gradually diminish.
• Forecast fee income growth3% year on yearSupported by migration of deposits into public mutual funds and wealth-management products, as well as active capital-market activity.
• CSI 300 Banks Index dividend yield5.0%The spread versus China's 10-year government bond yield is 3.4%, above the historical average of 1.6%.

Impact & implications

For investors seeking defensive income, high-dividend H-share banks remain attractive allocation candidates. Compared with banks with greater retail-risk exposure, state-owned major banks with solid corporate banking franchises are more likely to benefit from relatively strong corporate credit demand and fiscal spending. Rotation of capital from domestic and overseas markets into defensive assets could further support H-share bank valuations.

Risks

• The fading benefit from deposit repricing and declining yields on newly issued loans could cause net interest margin compression pressure to re-emerge in 2H26.
• Slowing macroeconomic activity could raise credit costs in 3Q26.
• Asset-quality pressure in consumer finance and credit cards may persist, posing higher risks to retail banks.
• Bond-trading income may slow from a high base, and improvement in non-interest income may fall short of expectations.
• Slower loan growth, cooling capital-market activity, or a reversal in capital rotation could weaken support for earnings and valuations.

What to watch

• Whether net interest income, net interest margins, and fee income in 2Q26 results meet forecasts.
• Whether falling deposit costs can continue to offset declining loan yields.
• The sustainability of wealth-management product sales, public mutual fund fundraising, and bond-trading gains.
• Changes in consumer loans, credit cards, and retail asset quality, as well as strengthening provisioning coverage buffers.
• Corporate credit demand, fiscal spending, export momentum, and cross-border fee income performance.
• The dividend-yield spread of H-share banks versus 10-year government bond yields and domestic and overseas capital flows.