Regional bank growth remains resilient, but gaps in net interest margins, revenue quality, and returns on capital are widening rapidly

Overview

The report compares Bank of Ningbo's and Bank of Nanjing's results for the second quarter of 2026. It concludes that both banks maintained generally solid growth and asset quality, but the focus in assessing regional banks is shifting from profit and loan scale toward the sustainability of net interest margins, growth quality, risk buffers, capital accumulation, and shareholder returns. Goldman Sachs continues to prefer Bank of Ningbo while remaining cautious about the sustainability of Bank of Nanjing's deposit-repricing benefits.

Core views

Both banks' second-quarter 2026 results demonstrated the relative resilience of high-quality regional banks, but their earnings drivers have clearly diverged. Bank of Ningbo continued to exhibit higher profitability and resilient fee income, while Bank of Nanjing mainly benefited from a rapid recovery in net interest margin driven by the repricing of deposit liabilities. Goldman Sachs therefore believes that as the benefits of deposit repricing gradually diminish in the second half of 2026, divergence in regional banks' share-price performance may accelerate. The market will place greater emphasis on balance-sheet strength, capital accumulation, and sustainable returns rather than focusing solely on headline profit growth. In terms of net interest margin, Bank of Nanjing recorded one of the stronger recoveries among peers, with its Goldman Sachs-calculated net interest margin rising to 1.39% in the second quarter of 2026, mainly due to liability-cost optimization and the repricing of high-cost deposits. By contrast, Bank of Ningbo's net interest margin fell to 1.51% despite lower deposit costs, reflecting continued pressure on asset yields from rapid loan expansion and competitive pricing for corporate loans. The report views deposit repricing as a continuing positive factor, but most of the benefits were already realized in the first half. As competition for deposits gradually intensifies, the extent of net interest margin improvement may slow in the second half of 2026, and regional banks may face greater pressure than large banks. Differences in the next stage will depend more on liability-cost management and balance-sheet optimization than on simply expanding loan scale. Loan growth remained strong, but market attention is shifting toward growth quality. Bank of Ningbo's loans grew 17% year over year, accelerating further and exceeding management's previous guidance range of 12%-15%, with corporate loans rising 28% year over year as the main driver. Bank of Nanjing's loans grew 13% year over year, maintaining a healthy and more balanced structure without significant acceleration. Amid slowing effective credit demand, investors are increasingly focused on whether new loans conserve capital, enhance margins, and are sustainable. Strong balance-sheet expansion supported near-term quarterly earnings, but whether rapid growth can continue without further compressing margins, consuming capital, or impairing future asset quality will be an important topic for regional banks in the second half of 2026. Non-interest income has become another major area of divergence. Due to a high base in the second quarter of 2025 and bond-market volatility in the second quarter of 2026, investment income came under pressure at both banks: it declined 28% year over year at Bank of Nanjing and 9% at Bank of Ningbo. Fee income moved in the opposite direction. Bank of Ningbo's fee income rose 26% year over year, supported by stronger wealth management, investment banking, and settlement businesses; Bank of Nanjing's declined 25% year over year due to weaker wealth-management demand, lower custody fee rates, and ongoing fee-reduction policies. Goldman Sachs expects trading- and investment-related income to become a less reliable source of growth as realized investment gains normalize and market volatility persists. Recurring fee income and customer franchises will therefore become more important, and Bank of Ningbo's stronger fee-income capabilities should help offset persistent pressure on net interest margins. Headline asset-quality indicators remained stable, but risk buffers diverged. Bank of Nanjing's non-performing loan ratio remained at 0.82%, while its non-performing loan coverage ratio declined further to 306%. Bank of Ningbo's non-performing loan ratio remained stable at 0.8%, and its coverage ratio improved to 373%, although new non-performing loan formation increased slightly quarter over quarter. The report believes investors will pay greater attention to retail credit performance, new non-performing loan formation, and balance-sheet resilience rather than focusing only on reported non-performing loan ratios. As credit growth slows, the trend in non-performing loan coverage ratios will become a more important differentiating indicator: Bank of Ningbo's continuously improving coverage ratio reinforces its risk-buffer advantage, while Bank of Nanjing's persistently declining coverage ratio may remain under scrutiny. Capital and shareholder returns are becoming important valuation drivers. Both banks' core Tier 1 capital adequacy ratios improved in the second quarter of 2026. Bank of Ningbo also announced an interim dividend equivalent to 16% of its net profit for the first half of 2026, further strengthening its shareholder-return profile. Goldman Sachs believes that as industry loan growth slows, banks capable of simultaneously strengthening capital, maintaining profitability, and improving shareholder returns are likely to command valuation premiums. Bank of Ningbo is a relatively prominent regional-bank beneficiary of this trend. Model revisions further illustrate the differences between the two banks' earnings structures. For Bank of Ningbo, based on better-than-expected second-quarter profit, resilient fee income, and operating leverage, Goldman Sachs raised its average 2026-2028 pre-provision operating profit and net profit after tax forecasts by 3.2% and 2.7%, respectively. It increased its average non-interest income forecast by 11.8%, but lowered its net interest margin assumption by an average of 2.2 basis points to reflect pressure on asset yields. For Bank of Nanjing, based on stronger-than-expected net interest income and a larger improvement in liability costs, Goldman Sachs raised its average pre-provision operating profit forecast for the same period by 1.8%, but lowered its average net profit after tax forecast by 1.5%. The recovery in net interest margin prompted a 9% average increase in the net interest income forecast, while weak fee income and lower investment income resulted in a 16% average reduction in the non-interest income forecast. Goldman Sachs continues to prefer Bank of Ningbo among regional banks, citing its higher and more sustainable return on equity of approximately 13%-14%, improving shareholder returns, 373% non-performing loan coverage ratio, stronger fee-income base, and more attractive earnings growth trajectory. Goldman Sachs maintains its Buy rating and raises its 12-month target price from RMB41.31 to RMB42.57, continuing to apply an unchanged 2027E price-to-pre-provision operating profit multiple of 4.25x. Bank of Nanjing's recovery in net interest margin has improved its near-term earnings outlook, but as the deposit-repricing cycle matures in the second half of 2026, the sustainability of its liability-cost benefits remains uncertain. Combined with a weakening non-performing loan coverage ratio and continued pressure on non-interest income, Goldman Sachs maintains its Neutral rating and slightly raises its target price from RMB12.20 to RMB12.43, applying an unchanged 2027E price-to-pre-provision operating profit multiple of 2.875x.

Analysis framework

Goldman Sachs first compares the two banks' second-quarter net interest margins, loan growth, investment and fee income, asset quality, and capital changes, and then assesses whether these drivers can be sustained in the second half of 2026. It subsequently incorporates the performance differences into its 2026-2028 earnings models, adjusting forecasts for net interest income, non-interest income, net interest margin, pre-provision operating profit, and net profit after tax for each bank. Finally, it determines the 12-month target prices using 2027E price-to-pre-provision operating profit multiples.

Methodology notes

• Financial Industry-Specific MetricsNet Interest Margin (NIM) Analysis

  Analysis of net interest margin and its asset-side and liability-side drivers

  The report explains changes in the two banks' net interest income through loan pricing, asset yields, deposit costs, and the repricing of high-cost deposits, and uses these factors to assess the sustainability of net interest margin improvement in the second half of 2026.

• Financial Industry-Specific MetricsProvision Coverage Ratio/Asset Quality

  Comparison of non-performing loan ratios, non-performing loan formation, and non-performing loan coverage ratios

  The report examines not only current non-performing loan ratios but also coverage ratios, new non-performing loan formation, and retail credit performance as indicators of risk buffers to differentiate the resilience of the two banks' balance sheets.

• Valuation Method

  2027E P/PPOP multiple valuation

  The report values the banks using market capitalization relative to pre-provision operating profit. It applies a multiple of 4.25x to Bank of Ningbo and 2.875x to Bank of Nanjing, deriving their respective 12-month target prices.

• Corporate Fundamentals and Financial Framework

  Earnings driver decomposition and forecast revisions

  Goldman Sachs decomposes earnings into net interest income, non-interest income, net interest margin, pre-provision operating profit, and net profit after tax. It adjusts its 2026-2028 forecasts based on actual second-quarter performance to distinguish growth scale from growth quality.

Asset mapping & comparison

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

• Bank of Ningbo (002142.SZ)

  The report views it as a regional-bank investment better aligned with the themes of high-quality growth, capital accumulation, and shareholder returns, and continues to favor it on a relative basis.

  Strengths

  Higher and more sustainable ROE of approximately 13%-14%, fee income growth of 26% year over year, a non-performing loan coverage ratio of 373%, an improved capital position, and an announced interim dividend equivalent to 16% of net profit for the first half of 2026.

  Weaknesses

  Net interest margin fell to 1.51%; rapid loan expansion and competitive corporate-loan pricing continued to pressure asset yields, while new non-performing loan formation increased slightly quarter over quarter.

  Comparison

  Compared with Bank of Nanjing, Bank of Ningbo has stronger fee income, provision buffers, earnings sustainability, and shareholder returns, but weaker net interest margin performance.

  Risks

  Net interest margin or asset quality may be weaker than expected, investment losses may exceed expectations, or deposits may flow out.

• Bank of Nanjing (601009.SS)

  Deposit repricing drove a significant recovery in net interest margin and improved the near-term revenue outlook, but Goldman Sachs believes the sustainability of these benefits remains uncertain.

  Strengths

  Goldman Sachs-calculated net interest margin rose to 1.39%, loans grew 13% year over year with a relatively balanced structure, the core Tier 1 capital adequacy ratio improved, and the non-performing loan ratio remained stable at 0.82%.

  Weaknesses

  Fee income declined 25% year over year, investment income declined 28% year over year, the non-performing loan coverage ratio fell to 306%, and trends in non-interest income and risk buffers were weak.

  Comparison

  Its recovery in net interest margin was stronger than Bank of Ningbo's, but its fee-income base, provision-coverage trend, and sustainability of earnings drivers were relatively weaker.

  Risks

  Net interest margin or fee-income growth may deteriorate, assets measured at fair value through other comprehensive income may incur losses, and the dividend payout ratio may decline.

Key data

• Bank of Nanjing's 2Q 2026 net interest margin1.39%Based on Goldman Sachs' methodology, driven by liability-cost optimization and the repricing of high-cost deposits
• Bank of Ningbo's 2Q 2026 net interest margin1.51%Despite lower deposit costs, it remained under pressure from loan expansion and competitive corporate-loan pricing
• Bank of Ningbo's loan growthUp 17% year over yearExceeded management's previous guidance range of 12%-15%
• Bank of Ningbo's corporate loan growthUp 28% year over yearThe main driver of loan expansion
• Bank of Nanjing's loan growthUp 13% year over yearThe growth structure was relatively balanced, without significant acceleration
• Bank of Ningbo's fee incomeUp 26% year over yearSupported by wealth management, investment banking, and settlement businesses
• Bank of Nanjing's fee incomeDown 25% year over yearAffected by wealth-management demand, custody fee rates, and fee-reduction policies
• Bank of Ningbo's investment incomeDown 9% year over yearAffected by a high base and bond-market volatility
• Bank of Nanjing's investment incomeDown 28% year over yearAffected by a high base and bond-market volatility
• Bank of Ningbo's asset qualityNon-performing loan ratio of 0.8%, coverage ratio of 373%The non-performing loan ratio remained stable and the coverage ratio improved, but new non-performing loan formation increased slightly quarter over quarter
• Bank of Nanjing's asset qualityNon-performing loan ratio of 0.82%, coverage ratio of 306%The non-performing loan ratio remained stable, but the coverage ratio declined further
• Bank of Ningbo's interim dividendEquivalent to 16% of net profit for the first half of 2026Strengthens its capital-return and shareholder-return profile
• Bank of Ningbo's earnings forecast revisionsAverage 2026-2028 PPOP/NPAT forecasts raised by 3.2%/2.7%Based on better-than-expected results, resilient fee income, and improved operating leverage
• Bank of Ningbo's non-interest income forecast revisionRaised by an average of 11.8%The net interest margin assumption was simultaneously lowered by an average of 2.2 basis points
• Bank of Nanjing's earnings forecast revisionsAverage 2026-2028 PPOP/NPAT forecasts adjusted by 1.8%/-1.5%Net interest income improved, but non-interest income and asset-quality factors remained constraints
• Bank of Nanjing's revenue forecast revisionsNet interest income raised by an average of 9%, non-interest income lowered by an average of 16%Reflects the recovery in net interest margin and weakness in fee and investment income, respectively
• Bank of Ningbo's valuationTarget price of RMB42.57, 2027E P/PPOP of 4.25xThe previous target price was RMB41.31; Buy maintained
• Bank of Nanjing's valuationTarget price of RMB12.43, 2027E P/PPOP of 2.875xThe previous target price was RMB12.20; Neutral maintained

Impact & implications

The report believes that the competitive focus for regional banks is shifting from loan scale and short-term profit growth toward liability-cost control, balance-sheet optimization, recurring fee income, risk buffers, capital accumulation, and shareholder returns. As the broad benefits of deposit repricing gradually diminish, banks with stronger customer franchises, sustainable ROE, and ample provisions are more likely to command valuation premiums. Bank of Ningbo better fits these characteristics, while Bank of Nanjing still needs to demonstrate that its recovery in net interest margin and improvement in liability costs are sustainable.

Risks

• Bank of Ningbo faces the risk that net interest margin or asset quality may be weaker than expected.
• Bank of Ningbo may experience larger-than-expected investment losses or deposit outflows.
• Bank of Nanjing faces the risks of net interest margin deterioration and weaker-than-expected fee-income growth.
• Bank of Nanjing may incur losses on assets measured at fair value through other comprehensive income.
• Bank of Nanjing's dividend payout ratio may be reduced.

What to watch

• Monitor the two banks' liability costs and net interest margin trends after deposit competition intensifies in the second half of 2026.
• Watch whether loan growth can continue without further compressing margins, consuming capital, or impairing future asset quality.
• Track retail credit performance, new non-performing loan formation, and changes in non-performing loan coverage ratios.
• Monitor whether recurring fee income can provide more significant earnings support after investment income normalizes.
• Watch whether Bank of Nanjing's net interest margin can improve further and whether its fee and investment income can recover.
• Track changes in the two banks' capital accumulation and dividend payout ratios.