Orient Securities: How to look forward to the 2027 net interest spread trend?

The Zhitong Finance App learned that Orient Securities released a research report saying that the banking sector is expected to return to the fundamental narrative in 2026: considering that banks are still in a centralized deposit repricing cycle, supporting a steady recovery in net interest spreads; structural risk exposure is still expected to be supported by policies, and banking revenue is expected to continue to improve in 26-27. At the same time, considering that the pressure on bank stock equalization funds to reduce their holdings has been greatly eased, the rebalancing of market risk appetite and style has helped banks increase their winning rate of obtaining relative returns in stages. It is recommended to focus on two main lines: 1. Major state-owned banks with stable fundamentals and good defensive value. 2. High-quality SMEs with determined fundamentals.

Orient Securities's main views are as follows:

Core ideas

Net interest spreads continued to stabilize in 2026. The core stems from a mismatch in the pace of asset and debt repricing. After the start of the 2022 interest rate cut cycle, loans were repriced every year along with LPR, and the return on assets took the lead in declining; the improvement in debt-side costs was evident from 2023 to the first three quarters of 2026, and the return on assets and liabilities declined by 25 bps simultaneously, and the decline on both ends remained flat. In addition, there are also two major supports that exceed expectations: first, credit pricing self-regulation restrictions, the focus of bank operations has shifted from scale expansion to efficiency priority, interest rates on new loans have basically stopped falling, and the difference in yield between stocks and new loans has continued to converge, and the drag on stock asset returns has weakened; second, increased regulation of interbank debt brought incremental dividends. At the end of 2024, the self-regulatory mechanism for interbank deposits and 2.0 was implemented successively in 2026, driving interbank debt costs to fall by 49 bps and 23 bps, exceeding the improvement range of 25 years and 26h1 Early market forecasting.

How to look forward to the 2027 interest spread trend?

1. The debt-side cost improvement dividend will decline significantly, and the contribution of deposit repricing will fall back to about 40% in 2026. (1) Deposits: On the one hand, the maturity scale of high-interest time deposits has shrunk drastically: it is estimated that the maturity scale of time deposits in 2027 was 118 trillion yuan, an increase of 4 trillion yuan over the previous year, mainly due to the natural increase in the deposit base, which led to a rise in total maturity. However, the maturity scale of high-interest deposits with a term of 2 years or more was about 21 trillion yuan, a decrease of 10.4 trillion yuan over the previous year. On the other hand, the repricing margin for various term deposits declined: the net interest spread was estimated to be boosted by about 8 bps due to the decline in deposit costs for the whole year, and the repricing dividend was about 40% of 2026. In terms of pace, 60% will be concentrated on the expiration of 27Q1, and debt dividends will basically be paid out centrally in the first half of the year. (2) Interbank liabilities: The Financial Street Forum mentioned that policy interest rate changes have limited impact on net interest spreads, and may be slightly beneficial in the short term. The policy interest rate is 15 bps. The interbank current interest rate is expected to take the lead in following the decline. It is estimated that it can provide interest spread support of about 0.7 bp; if subsequent interbank term interest rates decline at the same time and when combined with the NCD interest rate decline, the contribution to net interest spreads may be close to 2 bps.

2. On the asset side, loan interest rates are still facing downward pressure, but there is limited room for further decline. (1) Loans: In an environment where credit demand is weak, the pricing of new loans is expected to remain under pressure. Calculated from 10-year treasury bond yields, the 26H1 estimate shows a loan pricing bottom line of 2.56%, which is only 19 bps different from the stock loan yield of major state-owned banks. If we further assume that the agreed lower limit of 10Y treasury bond yield is 1.6%, then the gap between the loan pricing bottom line and stock loan yield is only about 30 bp, and the downside has narrowed significantly. (2) Investment in the gold market: The impact of declining bond investment income is also manageable. AC and FVOCI accounts are repriced only when the bonds expire and renew. The bank's AC+OCI portfolio lasts for about 5 years, that is, the annual maturity and reallocation scale is about 20%, superimposing an additional allocation of about 10%. Only 30% of bonds face a drop in yield throughout the year. Assuming that the return on investment in the gold market falls by 15 bps, it is estimated that the net interest spread will drag down about 4 bps. (3) End of replacement bonds: The issuance of 6 trillion yuan replacement bonds has come to an end. High-interest loans are no longer continuously being replaced with low-interest bonds, which is expected to bring about a slight positive support of 0.6 bp.

3. Under a neutral assumption, net interest spreads narrowed by about 3.3 BP in 2027. Under a neutral scenario where the economy, monetary policy, and loan pricing supervision remain stable, assuming a 15 bps decline in loan yields in 2027, compounded by a combination of factors such as deposits, interbank liabilities, and bond allocation, the industry's net interest spread is expected to narrow by about 3.3 bps for the whole year.

Risk Alerts

Monetary policy exceeds expectations and tightens; fiscal policy falls short of expectations; measures related risks.