Daiwa has released a research report marking its first coverage of Chinese banking stocks with a positive stance, assigning a "Buy" rating to China Construction Bank (00939), an "Outperform" rating to China Merchants Bank (03968), and a "Hold" rating to ICBC (01398). The brokerage believes the worst period for the sector's net interest margin has passed, and after three years of margin erosion and stagnant earnings, China's banking industry now exhibits conditions for a modest yet meaningful stabilization, with revenue growth for mainland banks projected at 5% to 6% between 2026 and 2027.

The report highlights that the industry's net interest margin has contracted by a cumulative 68 basis points since 2021. Daiwa estimates that approximately RMB 108 trillion in high-cost legacy deposits will mature this year, which is expected to drive a 21.4 basis point reduction in funding costs by 2026. On the asset side, around RMB 38 trillion in mortgage repricing has been fully absorbed, and the People's Bank of China has also paused cuts to the Loan Prime Rate (LPR).

Daiwa forecasts that the industry's net interest margin will stabilize at 1.40% to 1.41% during 2026 to 2027, implying an annual narrowing of just 1 to 2 basis points—a stark contrast to the 10 to 22 basis point annual declines seen from 2023 to 2025. This marks the first time since the pandemic that the net interest margin headwind has turned neutral. Asset quality remains manageable, with the non-performing loan ratio for property having peaked at 3.89% in 2023, and most legacy risks have already been provisioned for. The dividend yield for H-shares of mainland banks stands at approximately 5% to 6%, offering a premium of about 385 basis points over the 10-year government bond yield, while a core Tier 1 capital adequacy buffer of 300 to 400 basis points further supports dividend payouts and share prices.