GF Securities: The operating prosperity of banks in the first quarter has significantly rebounded. Focus should be on the sustainability of performance.

GF SEC released a research report stating that based on the first quarter report of banks over the past 26 years, the operating outlook of banks has significantly improved. The growth in industry revenue and profits is more evident in leading companies within the sector, while small and medium-sized banks show more differentiation. Looking ahead to the second quarter, the growth rate of core revenue (net interest income and fee and commission net income) is worth paying attention to, and the sustainability of performance needs to be a focus. It is recommended to pay close attention to large banks and mid-sized banks with a good customer base in services and retail, and to continue to focus on Bank of Ningbo (002142.SZ), China Merchants Bank (600036.SH), and state-owned large banks, with a focus on regional commercial banks such as BQD (002948.SZ) with good performance trends. GF SEC's main points are as follows: As of April 29, 2026, all 42 A-share listed banks have disclosed their 2025 annual reports and first quarter reports for 2026. Looking at the factors driving the growth of the consolidated net profit attributable to the parent company of these 42 listed banks, the main drag comes from a continued decline in net interest margins in 2025, contributing negatively to the growth rate of net profit by 8.47 percentage points, completely offsetting the positive contribution of scale expansion. Other positive factors include the recovery of fee income, improvement in effective tax rates and cost-to-income ratios. Other negative factors include a decrease in non-interest income growth and an increase in provision for bad debts. In the first quarter of 2026, there has been a significant change in the impact of various driving factors on performance. With a stabilizing net interest margin background, the pressure on operations that has been the greatest in recent years has eased, and banks have generally increased their provision for bad debts to strengthen their safety net. In the first quarter of 2026, the acceleration of scale expansion, improvement in cost-to-income ratios, and continued good performance of non-interest income have driven the performance growth by 9.49%, 2.56%, and 0.36% respectively, while increases in provision for bad debts, slight narrowing of net interest margins, and a decline in fee income growth have dragged down the performance by 6.49%, 2.29%, and 0.25% respectively. Comparing the first quarter of 2026 to the fourth quarter of 2025, positive drivers include a narrowing contribution of negative net interest margin by 6.17%, positive contribution of improving cost-to-income ratios by 2.16%, and a positive contribution from scale expansion by 1.02%, while negative drivers include a negative contribution from an increase in provision for bad debts by 6.31%. Overall, in the first quarter of 2026, the operating outlook of listed banks has significantly improved, with the growth in revenue and profits being more evident in leading companies within the sector, while small and medium-sized banks show more differentiation: (1) The stabilization of net interest margins has driven the recovery of the industry's outlook, and the year-on-year growth rate of net interest income has turned positive. On the asset side, the first quarter of 2026 saw a strong start in credit issuance, with the increment basically flat, high growth in financial investments, and marginally accelerated support for industry expansion; on the liability side, the de-banking of deposits is evident, active liabilities maintaining a high growth, and significant deposit losses in joint-stock banks, while urban commercial banks show greater stability in deposits. Net interest margins have stabilized, with a 1bp narrowing month-on-month, and rural commercial banks leading the way in recovery. (2) Steady improvement in fee income, benefiting from a favorable capital market, gradually increasing risk appetite of residents, gradual stabilization of the macroeconomy and consumption, accelerated growth in fee income from wealth management distribution and payment clearing business, with better performance in fee income for service-oriented banks. (3) Fair value changes turning positive on a low base, with differentiated performance in non-interest income. Due to the rise in long-term interest rates in the first quarter of last year, quarterly investment income contribution decreased significantly, while this year long-term interest rates remained stable, fair value changes on a low base have mostly turned positive, and the performance of investment income differs based on the base, with state-owned large banks with a low proportion of investment income showing the best performance in non-interest income, while urban and rural commercial banks, against the backdrop of significantly improved core revenue growth, actively digesting the high base of other non-interest income generated from the previous downswing in interest rates and profit realization. (4) Asset quality forward-looking indicators remain stable, with the significant recovery of core revenue, credit costs have risen year-on-year, prompting proactive thickening of provisions, and since 2021, revenue growth has surpassed profit growth for the first time. Looking ahead to the second quarter, the growth rate of core revenue (net interest income and fee and commission net income) is worth paying more attention to, with a focus on the sustainability of performance. It is recommended to actively focus on large banks and mid-sized banks with a good customer base in services and retail, and to continue to focus on Bank of Ningbo, China Merchants Bank, state-owned large banks, and to pay special attention to the performance trends of regional commercial banks such as BQD. Risk warning: Intensified deposit competition; international financial risks.