UBS Likes the Defensive Profile of Chinese Banks and the Improvement in 1Q Fundamentals

Overview

This is a UBS monthly pulse report on the Chinese banking sector, focusing on March credit data, recent performance of A-share and H-share banks, and expectations for the 1Q26 earnings season. The report points out that March new RMB loans were weak, especially household loans and long-term corporate loans, which were clearly weaker year on year, but new social financing was slightly above market expectations. Despite ongoing macro and property-market pressure, UBS remains constructive on bank stocks, particularly H-share banks supported by defensiveness, high dividends, and sequential improvement in fundamentals.

Core views

UBS's core view is: first, March credit data showed a combination of weak loans and slightly stronger social financing, indicating that real-economy financing demand remains uneven; second, banks' 1Q revenue, core profit, and pre-provision profit growth may continue to accelerate, providing a catalyst for share prices; third, net interest margins are expected to remain broadly stable sequentially, with mortgage repricing pressure likely offset by lower deposit and interbank funding costs; fourth, credit costs remain a drag on net profit growth, especially for unsecured retail and real-estate-related exposures; fifth, amid geopolitical uncertainty, a soft property market, and export pressure, defensive bank stocks still offer allocation value.

Analysis framework

The report combines monthly credit and social financing data, bank stock market performance, expectations for upcoming 1Q financial results, trends in net interest margin and fee income, asset quality and provisioning pressure, and relative comparisons among key banks to form its sector view. In valuation, UBS uses a three-stage dividend discount model for H-share banks and a P/B-ROE approach for A-share banks.

Methodology notes

• Valuation methodThree-stage dividend discount model (DDM)

  Value bank stocks by discounting future dividend cash flows

  UBS says its target prices for H-share Chinese banks are primarily based on a three-stage DDM approach, suitable for valuing bank stocks that emphasize capital returns, dividends, and long-term profitability.

• Valuation methodP/B to ROE

  Valuation matched between price-to-book and return on equity

  UBS says it uses a valuation method combining P/B and ROE for A-share Chinese banks, explaining valuation levels through banks' profitability and returns on book value.

• Profitability analysisPPOP

  Pre-provision operating profit

  The report uses PPOP as an important indicator of improvement in banks' core operations, and expects 1Q26 PPOP growth to rise from 2.0% in 4Q25 to 4.8%.

Asset mapping & comparison

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

• Chinese banking sector

  Sector coverage universe

  Strengths

  Relatively high dividend yields, sequentially improving fundamentals, and expected acceleration in revenue and PPOP growth.

  Weaknesses

  Weak loan demand, year-on-year weakness in household loans and long-term corporate loans, and net profit growth dragged by provisions.

  Comparison

  H-share banks have significantly outperformed MSCI China over the past month, while A-share banks have slightly underperformed the CSI300.

  Risks

  Deteriorating asset quality, pressure from real-estate exposure, profitability pressure from lower interest rates, and dilution risk from capital replenishment.

• H-share banks

  The bank sub-sector UBS prefers more

  Strengths

  Strong performance over the past month, dividend yields still above 5%, and defensive characteristics.

  Weaknesses

  Some names lack near-term fundamental catalysts and remain constrained by the macro and property-market backdrop.

  Comparison

  H-share banks have outperformed A-share banks, with CQRCB-H the best performer over the past month and MSB-H lagging.

  Risks

  Geopolitical issues, slower global growth, credit-cost pressure, and net interest margin pressure.

• A-share banks

  Peer comparison group

  Strengths

  BOC performed relatively well among A-share banks over the past month.

  Weaknesses

  The sector fell 0.9% over the past month, underperforming the CSI300.

  Comparison

  Compared with H-share banks, A-share banks have been weaker recently.

  Risks

  Market risk appetite, lower interest rates, asset quality, and capital constraints.

• The Big Four state-owned banks

  Key beneficiaries in the 1Q earnings season

  Strengths

  UBS expects core earnings, revenue, and PPOP growth to accelerate, providing a constructive catalyst for earnings season.

  Weaknesses

  Net profit growth is still constrained by higher provisioning.

  Comparison

  BOC is expected to lead in core earnings and revenue growth, ABC may have the strongest net profit growth but lag in revenue and PPOP, and BOCOM may benefit from a sequential rebound in net interest margin.

  Risks

  Pricing and financing size of capital injections, provisions, and new non-performing loans from retail and real-estate-related exposures.

• CITIC-H

  Preferred name by UBS

  Strengths

  The report believes its revenue and profit performance may lead among joint-stock banks.

  Weaknesses

  Still affected by sector credit costs and the market environment.

  Comparison

  Relative to MSB and IB, UBS believes CITIC is more likely to outperform.

  Risks

  Rising credit costs, net interest margin compression, and changes in market sentiment.

• MSB-H

  Removed from the APAC Key Call list

  Strengths

  Cheap valuation still offers some downside protection, with re-rating potential in the medium term.

  Weaknesses

  UBS believes it lacks strong near-term fundamental catalysts.

  Comparison

  It was a laggard within UBS's H-share coverage over the past month.

  Risks

  Higher credit costs, lack of short-term catalysts, and slower earnings recovery than peers.

Key data

• March new RMB loansRMB 2.99 trillionDown RMB 650 billion year on year, below the market expectation of RMB 3.25 trillion.
• March new social financingRMB 5.23 trillionDown RMB 670 billion year on year, but slightly above the market expectation of RMB 5.09 trillion.
• March loan growth rate5.7%Loan growth continued to slow as of March.
• March social financing growth rate7.9%Social financing growth eased slightly as of March.
• MSCI China Banks Index performance over the past month+6.4%Outperformed the MSCI China Index's -1.9%.
• A-share bank index performance over the past month-0.9%Underperformed the CSI300's -0.5%.
• Expected 1Q26 core earnings growth+3.5%Higher than +2.2% in 4Q25.
• Expected 1Q26 revenue growth+3.8%Higher than +2.4% in 4Q25.
• Expected 1Q26 PPOP growth+4.8%Higher than +2.0% in 4Q25.
• Expected 1Q26 net profit growth+1.2%Lower than +2.4% in 4Q25, mainly due to higher provisioning.
• H-share bank dividend yieldabove 5%UBS believes high dividends continue to support share price performance.

Impact & implications

For investors, the message of the report is that near-term catalysts for bank stocks are more likely to come from 1Q earnings in revenue, PPOP, and sequential net interest margin performance, rather than a strong rebound in aggregate credit demand. High dividends, defensiveness, and improving fundamentals make H-share banks attractive in an uncertain environment, but asset quality, provisions, and capital replenishment still need close monitoring.

Risks

• A weak macro backdrop and sluggish property-market activity could lead to deteriorating asset quality.
• Unsecured retail and real-estate-related exposures may create higher provisioning pressure.
• Capital adequacy and refinancing may bring dilution risk.
• Lower interest rates may compress banks' profitability and net interest margins.
• Insufficient loan demand may weaken the sustainability of revenue growth.
• Geopolitical conflicts, RMB appreciation, and slower global growth may weigh on risk appetite.

What to watch

• Whether 1Q earnings show the expected acceleration in revenue, core earnings, and PPOP growth.
• Sequential net interest margin performance, especially the effects of deposit cost savings, new loan pricing, and mortgage repricing.
• The pace of recovery in fee income, especially for banks with a higher share of wealth management.
• The contribution of bond trading income to revenue growth.
• The formation of new non-performing loans in retail and real-estate loans.
• Pricing and financing size details of capital injections into ABC and ICBC.
• Whether H-share bank dividend yields can remain at attractive levels.