Bank of Hangzhou's 4Q25 and 1Q26 results were in line with expectations; Neutral rating maintained

Overview

This report is J.P. Morgan's review of Bank of Hangzhou-A (600926.SS) 4Q25 and 1Q26 results. The report believes overall results were in line with expectations. Positives include strong 1Q26 net interest income growth, signs of net interest margin stabilization, continued solid asset quality, and a higher payout ratio; negatives include weaker-than-expected non-interest income, a marginal decline in the core tier-1 capital ratio, and relatively less attractive shareholder returns versus peers.

Core views

The core view is to maintain a Neutral rating. Bank of Hangzhou benefits from an advantage in understanding local customers within the Hangzhou and Zhejiang regional economy, particularly among SME clients related to the digital economy, cultural media, and technological innovation, creating a certain moat; the company also has strong relationships with local governments, and asset quality benefits from Zhejiang's economic resilience. However, compared with the covered city commercial bank peers, its shareholder return profile is still not outstanding enough. Its FY25E dividend yield is about 4.4%, around 30bps lower than peers, so the target price of Rmb15.60 is below the share price at the time of the report.

Analysis framework

The report focuses on quarterly profit and loss, net interest margin, asset quality, capital adequacy ratio, dividends, and valuation. Analysts compare 4Q25, 1Q26, and half-year data, with emphasis on the sources of net interest income growth, changes in loan yields and deposit costs, the special mention loan ratio and NPL coverage ratio, as well as marginal changes in non-interest income and capital ratios. Valuation uses a dividend discount model.

Methodology notes

• Valuation methodsDividend discount model

  Estimate the target price based on long-term shareholder returns and cost of capital

  The Dec-26 target price of Rmb15.60 is based on a dividend discount model, assuming a cost of equity of 13.4%, normalized ROE of 10.2%, and a terminal date of December 31, 2027.

• Bank operating analysisNet interest margin and funding cost analysis

  Break down the impact of changes in asset yields and funding costs on net interest income

  The report believes the 21% year-on-year growth in 1Q26 net interest income was mainly driven by the liability side, with time deposit repricing helping interest expense decline 11% year-on-year; in 2H25, asset yields fell 26bps, but deposit costs fell 25bps, partially offsetting pressure on the asset side.

• Bank risk analysisAsset quality indicator tracking

  Assess credit risk through the NPL ratio, special mention loan ratio, and provision coverage ratio

  The 1Q26 NPL ratio was flat quarter-on-quarter, while the special mention loan ratio fell 5bps quarter-on-quarter; although the provision coverage ratio declined 21 percentage points quarter-on-quarter, the absolute level of 481% remained high.

Asset mapping & comparison

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

• 600926.SS

  Core covered name

  Strengths

  Strong regional economic resilience, stable net interest income growth, good asset quality indicators, and a higher payout ratio.

  Weaknesses

  Non-interest income was weaker than expected, the core tier-1 capital ratio declined marginally, and shareholder returns are not as compelling as those of covered peers.

  Comparison

  The report notes that the company's FY25E dividend yield is about 4.4%, around 30bps lower than covered city commercial bank peers; its 2024 payout ratio of 24% is also below the covered peer average of 27%.

  Risks

  Fee growth below expectations, net interest margin compression above expectations, and deteriorating asset quality; upside risks include net interest margin expansion, better-than-expected loan and fee growth, and stronger-than-expected macro growth.

Key data

• 1Q26 net profit growth+4% YoY4Q25 net profit grew +1% year-on-year, and 1Q26 grew +4% year-on-year, broadly in line with expectations.
• 1Q26 net interest income growth+21% YoYMainly driven by lower funding costs, with interest expense down 11% year-on-year.
• 1Q26 non-interest income growth-26% YoYFee income fell 11% year-on-year, while non-fee income fell 37% year-on-year, weaker than expected.
• 2H25 net interest margin change+2bps HoHManagement expects FY26 net interest margin compression to be smaller than FY25's year-on-year -5bps.
• 1Q26 non-performing loan ratio0.76%Flat quarter-on-quarter and flat year-on-year.
• 1Q26 special mention loan ratio0.47%Down 5bps quarter-on-quarter and down 7bps year-on-year.
• 1Q26 NPL provision coverage ratio481.4%Down about 21 percentage points quarter-on-quarter, but the absolute level remains high.
• FY25 payout ratio26.4%Increased from 24.5% in FY24 to 26.4% in FY25.
• 1Q26 core tier-1 capital ratio9.56%Down 5bps and 3bps quarter-on-quarter in 4Q25 and 1Q26, respectively.
• Target priceRmb15.60The current price is Rmb17.4222, implying about -10.5% target price downside.

Impact & implications

The report expects the market reaction to these results to be relatively muted. Strong net interest income growth and stable asset quality help support earnings quality, but the decline in non-interest income, a marginal decline in capital ratios, and relatively weaker shareholder returns versus peers limit valuation upside. If future net interest margin compression continues to narrow, loan and fee growth outperform expectations, or macro growth improves, the share price could see upside catalysts; conversely, weaker-than-expected fee growth, greater-than-expected net interest margin compression, or deteriorating asset quality would constitute downside risks.

Risks

• Fee growth below expectations.
• Net interest margin compression greater than expected.
• Deteriorating asset quality, especially pressure on retail asset quality.
• A continued marginal decline in the core tier-1 capital ratio or slower-than-expected progress in the private placement.
• If shareholder returns remain relatively low versus peers, valuation attractiveness may be constrained.

What to watch

• Whether FY26 net interest margin compression narrows versus FY25 as management expects.
• The sustainability of lower deposit costs on the liability side and time deposit repricing.
• Whether non-interest income, especially fee income and non-fee income, can return to growth.
• Changes in the retail business NPL ratio and the trend of the special mention loan ratio.
• Progress of the Rmb8bn private placement and its replenishment effect on the core tier-1 capital ratio.
• Changes in the payout ratio and dividend yield relative to peers.