China banks (H/A) Report Interpretation

Overview

This industry earnings review assesses 1H26 results for China’s H- and A-share banks. The report argues that resilient pre-provision earnings were offset by higher tax charges and provisions, producing a K-shaped outcome across bank groups and a more selective sector stance.

Core views

H-share banks’ 1H26 net profit was broadly in line with BofA estimates except for China Everbright Bank, while core earnings generally beat. The report’s central finding is a continued K-shaped divergence: Big Six state-owned banks accelerated net-profit growth from 3.4% YoY in 1Q26 to 4.4% in 1H26, and core-earnings growth rose from 12.1% to 12.6%. In contrast, joint-stock banks’ net-profit growth slowed from -1.2% to -3.5%; city and rural banks remained comparatively steady at 7.4%-7.6%. Higher effective tax rates—14.9% on average in 1H26, up 1.6ppt YoY and 2.2ppt from 1Q—together with heavier provisions limited the translation of core operating strength into bottom-line earnings. Balance-sheet growth decelerated further. Average loan growth slowed to 5.0% YoY in 1H26 from 5.6% in FY25 and 5.1% in 1Q26. The Big Six still led, with 4.0%-6.4% half-on-half growth largely driven by corporate lending, whereas most mid-cap banks grew loans by less than 3% HoH. Mortgage and credit-card loans declined further, shifting the mix toward lower-yielding corporate credit. Deposit growth likewise slowed to 4.9% YoY, or 3.9% HoH. This weaker volume and mix backdrop is important because it constrains revenue growth even where funding costs are falling. Margin pressure paused but has not disappeared. Sector-average NIM edged up 1bp QoQ to 1.44% in 2Q26 as time-deposit repricing lowered deposit costs sharply. However, the report notes that the loan mix continued to deteriorate: loan yield was already only 2.9% in 1H26, versus funding cost of 1.3%, while bond yield remained relatively high at 2.6%. As higher-yielding bonds mature and are reinvested at lower rates, asset yields should face renewed pressure. BofA expects NIM to remain stable in 2H26 but sees renewed pressure in 2027. Non-interest income supported earnings unevenly. Fee-income growth slowed from 4.8% YoY in 1Q26 to 0.9% in 1H26: stronger wealth-management and custody income was offset by weak bank-card and credit-commitment fees. PSBC led with 12% fee-income growth, while ABC and CCB declined against high prior-year bases. Other non-interest income increased 12% on average and by 25%-50% at CCB, ABC and ICBC, driven by bond-disposal and equity-revaluation gains. Cost-income ratios improved, particularly at PSBC, where G&A fell 17% YoY and deposit-agency fees rose only 1%. Credit costs were the key offset to operating momentum. The average NPL ratio rose 1bp QoQ to 1.24%; write-offs/gross NPL formation increased to 65bp/78bp in 1H26 from 55bp/64bp in 1H25. Developer NPLs remained elevated at 4.5%, while retail stress worsened: mortgage NPLs rose 13bp HoH to 0.96% and card-loan NPLs increased 27bp to 2.83%. BoComm’s retail NPL ratio rose 44bp HoH to 2.02%, and BOC’s retail NPL formation was also high at 54bp. Average credit cost rose 12bp YoY to 86bp, total provisions increased 23% YoY, and NPL and loan-reserve coverage fell to 225% and 2.7%, respectively. The report therefore distinguishes stronger state-bank earnings from greater retail asset-quality pressure at parts of the mid-cap sector. Share-price performance and dividends have made valuation less forgiving. H-share banks gained 12.4% YTD excluding dividends, outperforming MSCI China, the HSI and H-FIN indices by 20.7ppt, 12.6ppt and 9.0ppt. The sector traded at 0.55x forward P/B, 6.0x P/E and 3.6x P/PPOP, compared with troughs of 0.34x P/B, 3.2x P/E and 1.9x P/PPOP in January 2024. Gross sector dividend yield has declined from nearly 10% in January 2024 to 5.2%, close to its lowest level since June 2018. BofA believes near-term absolute upside is limited, though it views banks as providing downside protection during China-market corrections, consistent with their historically defensive, lower-beta behavior. The Big Six increased headline payout ratios by 1ppt to 31%, adding 13-18bp to dividend yields. The institution continues to prefer ICBC, ABC-H and CCB-H for balance-sheet strength, steadier earnings and relatively attractive yields, and also likes CNCB-H and BONB.

Analysis framework

The report compares 1H26 and 2Q26 earnings, balance-sheet growth, funding costs, loan mix, fee income, credit costs, asset quality, capital and dividends across large state-owned, joint-stock, city and rural banks. It then links these operating trends to valuation multiples, dividend yields and relative H-share performance to form its selective sector view.

Methodology notes

• Financial-sector metricsNet Interest Margin (NIM) Analysis

  Net interest margin analysis

  The report compares loan yields, funding costs and bond yields to explain why NIM stabilized in 2Q26 but may come under pressure when bonds are reinvested at lower yields.

• Financial-sector metricsProvision Coverage and Asset Quality

  Asset-quality and provisioning analysis

  It tracks NPL ratios, NPL formation, retail and developer delinquencies, credit costs and reserve coverage to assess the earnings impact of rising provisions.

• Valuation methodsPB valuation

  Price-to-book, P/E and P/PPOP valuation comparison

  The report uses forward P/B as the primary sector valuation reference, alongside P/E and P/PPOP, to compare current valuation with prior troughs and recent peaks.

Asset mapping & comparison

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

• ICBC (1398 HK)

  Preferred H-share bank

  Strengths

  Strong double-digit PPOP growth, strong balance sheet, steady earnings growth and relatively attractive dividend yield.

  Weaknesses

  Higher provisions amid retail NPL pressure.

  Comparison

  Named among BofA’s preferred ICBC, ABC-H and CCB-H selections.

  Risks

  Retail asset-quality pressure and higher credit costs.

• Agricultural Bank of China (1288 HK)

  Preferred H-share bank

  Strengths

  Strong revenue and PPOP growth in 1H26; strong balance sheet and attractive dividend yield.

  Comparison

  Named among BofA’s preferred ICBC, ABC-H and CCB-H selections.

  Risks

  Rural-lending asset-quality deterioration, capital-constrained growth and margin compression.

• China Construction Bank (939 HK)

  Preferred H-share bank

  Strengths

  Strong 1H26 results supported by investment income; strong balance sheet and dividend yield.

  Comparison

  Named among BofA’s preferred ICBC, ABC-H and CCB-H selections.

  Risks

  Higher credit costs, system asset-quality deterioration and margin pressure.

• China CITIC Bank (998 HK)

  Preferred H-share bank

  Strengths

  1H26 results in line and higher payout.

  Comparison

  Also liked by BofA alongside the top three H-share picks.

• Bank of Ningbo (002142 CH)

  Preferred A-share bank

  Strengths

  Solid 1H26 earnings beat.

  Comparison

  Also liked by BofA.

Key data

• Big Six net-profit growth4.4% YoY in 1H26Accelerated from 3.4% in 1Q26.
• Joint-stock-bank net-profit growth-3.5% YoY in 1H26Slowed from -1.2% in 1Q26.
• Average loan growth5.0% YoY1H26, down from 5.6% in FY25 and 5.1% in 1Q26.
• Average NIM1.44%2Q26, up 1bp QoQ.
• Average credit cost86bp1H26, up 12bp YoY.
• H-share bank performance+12.4% YTDExcluding dividend yield; outperformed MSCI China by 20.7ppt.
• H-share bank valuation0.55x forward P/B, 6.0x P/E, 3.6x P/PPOPCurrent sector valuation after rerating.
• Sector gross dividend yield5.2%Down from nearly 10% in January 2024.

Impact & implications

The report sees selected large state-owned banks as better positioned to absorb slower loan growth, rising taxes and provisions through stronger core earnings, balance sheets and dividends. For the wider sector, the valuation rerating and lower dividend yield reduce near-term upside despite the defensive characteristics BofA attributes to H-share banks.

Risks

• Renewed NIM compression as lower-yielding bond reinvestment reduces asset yields, particularly from 2027.
• Further deterioration in retail credit quality, including mortgages and credit cards, could require higher provisions.
• System-wide asset-quality weakness, higher credit-cost requirements and slower loan growth could pressure earnings.
• Elevated sector valuation and lower dividend yields limit near-term absolute upside, according to the report.

What to watch

• Whether NIM remains stable in 2H26 as deposit repricing benefits are weighed against lower asset and bond reinvestment yields.
• Trends in retail NPL formation, mortgage and card-loan delinquencies, credit costs and reserve coverage.
• The persistence of the earnings gap between large SOE banks and joint-stock banks.
• Loan and deposit growth, particularly corporate lending versus weaker mortgage and credit-card demand.
• Interim-dividend announcements from CIB, BOJS, BONJ, BOSZ, CQRB and CSRB.