Goldman Sachs: Industrial Bank's NIM decline may narrow, but Sell rating maintained

Overview

This report is Goldman Sachs' meeting notes following discussions with Industrial Bank's investor relations team during Asia Financials Corporate Day. It focuses on operating variables including NIM, loans, deposits, fee income, investment income, asset quality, capital and dividends, and ROE. Management commentary overall indicates easing margin pressure and resilience in corporate loans and fee income, but weak retail demand, declining ROE, and a slower pace of funding cost improvement remain the main constraints.

Core views

Goldman Sachs maintains its Sell rating on Industrial Bank and its 12-month target price of Rmb17.89. Operationally, the 2026 NIM decline is expected to narrow to within 10bp, guidance for Rmb300bn in new corporate loans is unchanged, time deposit repricing will continue to support funding cost improvement, and fee income is supported by wealth management and custody. The main pressures are weak retail loan demand, a high base for investment income in the first half, no turning point yet in retail asset quality, and a high probability of ROE declining over the next two years.

Analysis framework

The report is primarily based on management commentary and breaks down Industrial Bank's 2026 operating trends into seven themes: NIM, loans, deposits, fee income, investment income, asset quality, capital, and shareholder returns. It also combines Goldman Sachs' 2027E P/PPOP valuation framework, factor profile, and disclosure appendix to explain the target price and key risks.

Methodology notes

• Meeting notesManagement key point summary

  All comments are from management unless otherwise stated.

  The report organizes the Asia Financials Corporate Day discussion into seven themes—NIM, loans, deposits, fee income, investment income, asset quality, capital, and returns—to assess 2026 operating trends.

• Valuation methodsP/PPOP

  The 2027E target P/PPOP multiple is 2.25x.

  Goldman Sachs sets a 12-month target price of Rmb17.89 based on a 2027E target P/PPOP multiple and maintains a Sell rating.

• Factor profileGS Factor Profile

  Growth, Financial Returns, Multiple, Integrated.

  Goldman Sachs uses percentiles relative to the market and peers to measure growth, financial returns, valuation multiples, and integrated attributes. For financial stocks, it mainly uses indicators such as EPS, revenue growth, ROE, P/E, P/B, and P/D.

• M&A probabilityM&A Rank

  M&A probability scores from 1 to 3.

  The disclosure appendix explains that Goldman Sachs uses qualitative and quantitative factors to assess the probability of a company becoming an acquisition target; when M&A probability is high it may be included in the target price, while low probability is usually excluded.

• Data toolsQuantum

  Goldman Sachs proprietary financial database.

  Quantum provides historical financial statements, forecasts, and ratio data for deep single-company analysis and cross-industry, cross-market comparisons.

Asset mapping & comparison

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

• Industrial Bank A-shares (601166.SS)

  Stock of the company covered by the report

  Strengths

  Corporate loan growth is relatively steady, time deposit repricing continues to lower funding costs, wealth management and custody support fee income, risks in corporate real estate and LGFV exposure are showing signs of convergence, and there is a basis for a gradual increase in the dividend payout ratio.

  Weaknesses

  Retail non-credit-card loans may post negative growth for the full year, retail asset quality has not yet reached a turning point, ROE is likely to decline over the next two years, investment income faces pressure from a high first-half base, and the pace of funding cost decline may slow.

  Comparison

  Management said total loans still posted slight growth in 2Q, outperforming some peers that saw sequential declines; the gap in corporate loan pricing versus large state-owned banks is limited, and Industrial Bank seeks growth and pricing power by reaching mid-sized clients in the upstream and downstream ecosystems of core enterprises through industrial finance.

  Risks

  Goldman Sachs lists upside risks to the target price including better-than-expected NIM, significantly improved asset quality, and a higher dividend payout ratio; operationally, attention should be paid to retail risk and downward ROE pressure.

Key data

• Report date2026-06-25Published by Goldman Sachs Equity Research at 17:22 Hong Kong time.
• RatingSellGoldman Sachs' investment rating on Industrial Bank.
• 12-month target priceRmb 17.89Based on a 2027E target P/PPOP multiple of 2.25x.
• Disclosed current priceRmb 17.12The price stated in company-specific regulatory disclosures.
• Implied upsideapproximately +4.5%Calculated from the target price of Rmb17.89 and disclosed current price of Rmb17.12.
• 1Q26 YoY NIM decline18bpIndustry trends, temporary asset mix, and accounting methodology contributed about 7bp, 5bp, and 6bp, respectively.
• Expected full-year 2026 NIM declinewithin 10bpReduced asset repricing pressure and deposit rate cuts are the main supports.
• New loan pricingapproximately 3.1%The spread versus existing loans has narrowed to within 10bp.
• 2026 target for new corporate loansRmb 300bn60%-70% of the target was deployed in 1Q, and full-year guidance is unchanged.
• Maturing time deposits in 2026Rmb 540bnOf this, Rmb400bn will be replaced in the last three quarters, with expected interest cost savings of 140-150bp.
• Cost of newly replaced time depositsapproximately 1.7%-1.8%The drag on overall funding costs has declined from before.
• 1Q26 fee income growth+7.4% YoYMainly driven by wealth management, insurance, precious metals, and custody business.
• 1Q26 YoY change in investment incomeapproximately -Rmb 300mnAffected by a high base in 1H25 and a Rmb500mn reduction in bond disposal gains from the AC account.
• New real estate NPL formationfull-year decline of 40%-60% YoY expectedIt declined by about 45% in 1Q, and the latest data show a decline of about 60%.
• True new credit card NPL formationafter adjustment, approximately down 4.5% YoYThe apparent increase mainly came from reclassification after the transition period for new financial asset risk classification rules ended.
• Collateral coverage of retail non-credit-card loansmore than 90% backed by mortgages, with blended LTV of about 50%Management believes full-year risk remains within expectations.
• Dividend and capital instrument replacementannualized interest expense savings of about Rmb 2bnReplacing with lower-cost capital instruments helps increase DPS while keeping the payout ratio stable.
• ROE trendhigh probability of decline over the next two yearsManagement believes ROE remains on a downward trajectory in the short term.
• 2026 revenue and net profitexpected to be broadly in line with FY20251Q is viewed as the low point of the year, with gradual improvement expected in subsequent quarters.

Impact & implications

For Industrial Bank's stock, these meeting notes signal marginal operating improvement, especially in a narrowing NIM decline, corporate loan growth, time deposit repricing, and fee income growth. However, these improvements are not enough to change Goldman Sachs' Sell view, because weak retail loan demand, declining ROE, pressure from the investment income base, and slower funding cost improvement may still weigh on valuation.

Risks

• If NIM is better than expected, it could lift earnings and valuation, representing upside risk to the Sell rating and target price.
• If asset quality improves significantly, especially with faster resolution of real estate and retail risks, it would represent upside risk to the target price.
• If the dividend payout ratio is higher than expected, it could improve shareholder returns and support valuation.
• New NPL formation in retail business loans and parts of the mortgage portfolio is still rising, with no clear turning point yet.
• ROE is highly likely to decline over the next two years, which may continue to weigh on valuation.
• The spread between old and new deposit rates is narrowing, and the industry-wide pace of funding cost decline may slow.
• Investment income in the first half is affected by a high base and a conservative bond disposal strategy; full-year improvement depends on easing high-base pressure in 2H and asset allocation adjustments.

What to watch

• Whether the YoY NIM decline in 2Q26 and for the full year continues to narrow to within 10bp.
• Progress toward the 2026 Rmb300bn new corporate loan target, and whether retail non-credit-card loans decline as expected.
• Progress in repricing Rmb400bn of time deposits over the last three quarters, and whether the 140-150bp interest cost savings can be delivered.
• Whether growth in wealth management and custody fees continues, and whether the decline in credit card fee income keeps narrowing.
• Whether high-base pressure on investment income eases in 2H, and changes in FVTPL and high-yield AC bond allocation.
• Changes in new NPL formation in real estate, LGFVs, credit cards, business loans, and mortgages.
• Dividend payout ratio, conditions for convertible bond conversion, and timing of the rollout of the IRB capital measurement approach.
• Whether 2026 revenue and net profit growth can remain broadly in line with FY2025.