"Anti-involution" constitutes a "directional" benefit for China's banking industry, JP Morgan: In 2016, supply-side reform nearly doubled bank stocks, but this time it will be more moderate

Since the beginning of this year, the central government has been intensively voicing its stance on "anti-involution." With policy support and rapid responses from various industries, the enthusiasm for "anti-involution" continues to rise.

According to Xinhua News Agency, the sixth meeting of the Central Financial Committee held on July 1 proposed to govern low-price and disorderly competition among enterprises in accordance with laws and regulations, guide enterprises to improve product quality, promote the orderly exit of backward production capacity, and release a new signal of "anti-involution" at the national level.

According to news from the Chasing Wind Trading Platform, JP Morgan stated in its latest research report that "anti-involution" is beneficial for the banking industry, especially for joint-stock banks, which may drive a rebound in net interest margins and enhance earnings, but the impact will be milder than the supply-side reform in 2016.

The report predicts that under the push of "anti-involution," the banking industry's profits are expected to achieve an upward potential of 8% by 2026, mainly driven by the recovery of net interest margins, with the net profit impact for joint-stock banks reaching 14%.

Historical experience shows significant improvement potential for net interest margins

The report states that the supply-side reform from 2016 to 2018 successfully reduced excess production capacity in certain industries, pushing the PPI from -5.2% in 2015 to +6.3% in 2017, which was positively correlated with nominal GDP growth.

During this period, the MSCI China Banking Index rose 97% from February 2016 to January 2018, with bank revenues recovering alongside nominal GDP, and net interest margins rebounding by 18 basis points without any policy interest rate hikes, while the non-performing loan generation rate began to decline from its peak in 2015.

The report predicts that the positive impact of this round of "anti-involution" may be smaller than the previous reform, but it may bring about an upward trend in net interest margins and income, although some of this may be offset by higher non-performing loan generation in the manufacturing and metal mining sectors.

Joint-stock banks may have more advantages

The report shows that after the supply-side reform from 2017 to 2019, under the condition of no changes in policy interest rates, banks achieved significant expansion in net interest margins. Loan yields increased by 41 basis points, while deposit rates only rose by 27 basis points, improving the loan-to-deposit spread by 11 basis points.

Among them, joint-stock banks expanded their net interest margins by 47 basis points, far exceeding the 7 basis points of state-owned banks, mainly benefiting from higher risk appetite and lower exposure to large state-owned enterprises. Under the core assumptions of improved loan pricing (the benchmark interest rate spread for corporate and retail loans rising to half of the level from 2017-2019), a 1 percentage point increase in the proportion of retail loans, and an increase in the proportion of demand deposits (a quarter of the contraction from 2021-2024), JP Morgan's sensitivity analysis shows that the potential upward space for net interest margin in 2026 is 17 basis points, with joint-stock banks at 24 basis points and state-owned banks at 9 basis points.