Buy bank stocks in the fourth quarter? Morgan Stanley: For the first time, a "natural cyclical bottom" without large-scale stimulus, the Chinese banking industry enters a new era

Morgan Stanley believes that domestic bank stocks will welcome good investment opportunities in the fourth quarter and the first quarter of next year after experiencing seasonal adjustments in the third quarter.

According to news from the Trend Trading Desk, on October 20, the Asia-Pacific analyst team at Morgan Stanley published a research report, pointing out that domestic bank stocks are about to complete the cycle bottom in the third quarter. This is the first time that China's financial system has achieved a "natural cyclical bottom" without large-scale stimulus policies—both the rebound in M1 growth and the improvement in industrial enterprise profits have been completed without significant stimulus.

The research report analyzes that the upcoming dividend distribution in the fourth quarter, stabilized interest rates, support from RMB 500 billion structural financial policy tools, and a more sustainable policy path will all support the revaluation of bank stocks.

Analysts pointed out that the investment logic that relied on strong stimulus in the past has become ineffective. The new focus should shift to high-quality banks that profit earlier and rebound more strongly in a "natural clearing" environment.

Historical First: "Natural Cyclical Bottom" Without Large-Scale Stimulus

Morgan Stanley emphasizes that the current Chinese financial system is undergoing an unprecedented change: achieving a "natural cyclical bottom" without large-scale stimulus and further monetary easing.

This indicates that the risk clearing in the financial system is nearing its end, and the industry is shifting from a risk control model of the past decade to a development model. Multiple signs confirm this judgment:

• Credit growth is more aligned with economic growth: As of September 2025, the growth rate of social financing has slowed to 8.7%, and loan growth has slowed to 6.4%. This moderate growth is more aligned with nominal GDP growth, which is beneficial for the stability of bank asset returns.

(In September, the growth rate of social financing slowed to 8.7%)

• Improvement in corporate liquidity and confidence: Meanwhile, the growth rate of M1 (narrow money) and corporate demand deposits has continued to accelerate since the beginning of 2025. This historically signals an improvement in corporate liquidity and operational confidence, indicating that risks are easing.

(Since the beginning of 2025, corporate deposits have continued to increase, especially demand deposits)

• Supply-side structural optimization is showing results: Under the guidance of "anti-involution" policies, the growth of manufacturing capital expenditure has slowed (from 6.2% in July to 4.0% in September), and credit flow has become more rational. This has effectively alleviated the overcapacity issues in some industries, and the gap between fixed asset investment in manufacturing and industrial added value has closed by September. As a result, although short-term macro growth has slowed, industrial enterprise profits are gradually improving, and the year-on-year decline in PPI is also continuously narrowing

(PPl index remains stable month-on-month)

Farewell to "Boom and Bust": The Chinese Banking Industry Enters a New Era of Steady Development

The report believes that the Chinese financial industry has entered a relatively benign long-term operating environment, and the revaluation of bank stocks will continue. Its core driving forces are three:

• Continuous digestion of high-risk assets: Controlling the inflow of funds into overcapacity industries through market-oriented methods, the scale of high-risk assets is steadily declining. Morgan Stanley predicts that the proportion of high-risk assets in total credit will decrease from 9.2% in 2024 to around 3% in the coming years. This will significantly reduce the risk premium of Chinese financial stocks.

(Changes in high-risk assets)

• Moderate and steady credit demand: Policies no longer pursue the stimulation of "boom and bust" in credit. Driven by technological innovation and industrial upgrading, credit demand will maintain a moderate and steady growth of 5-6% per year (slightly higher than the nominal GDP growth forecast of about 4%), which is sufficient to support banks in obtaining reasonable asset returns and stable net interest margins.
• Shift of household wealth to bank stocks: With strict regulation of shadow banking and the fading of the real estate bubble, the alternatives for household investments are decreasing. The large and still-growing household financial assets (reaching 297 trillion RMB by the end of Q2 2025) will continue to provide strong inflow support for bank stocks.

Four Supporting Factors Driving the Fourth Quarter Market

The report believes that four key factors will jointly support the performance of bank stocks in the fourth quarter:

• Dividend-driven capital inflow: Banks typically pay interim dividends at the end of December and early January, which will attract capital inflows. Especially considering the continuous strong growth of household financial assets since 2022 (growing 12% year-on-year to 297 trillion RMB by Q2 2025) and the robust sales of insurance products, the allocation demand from institutional investors such as insurance funds will be very strong.

(In Q2 2025, the year-on-year growth rate of Chinese household financial assets accelerated to 12%, compared to 10.8% in Q1)

• Fundamentals reaching an inflection point: The operational pressure on banks is easing. The upcoming Q3 2025 reports are expected to show that the pressure on net interest margin (NIM) is mild (only a low single-digit basis point decline month-on-month), and fee income continues to rebound driven by active capital markets. This will be an important signal to verify which banks can achieve profit recovery first
• Policy support for "pro-bank": The newly launched 500 billion RMB structural financial policy tool (with 289 billion already deployed as of October 17) aims to supplement project capital and support credit demand, without putting pressure on banks' loan yields like "flood irrigation." This measure reduces the risk of economic downturn and the likelihood of further interest rate cuts.
• Interest rate environment stabilizing: If the Loan Prime Rate (LPR) remains stable for the remainder of 2025, it will become another key catalyst for bank stocks. Since 2025, the 1-year and 5-year LPR have only been lowered by 10 basis points, far less than the 35 and 60 basis points in 2024. A stable LPR indicates stability in loan and financial asset yields, alleviating market concerns about sustained pressure on interest margins.

(Since 2025, both the 1-year and 5-year loan benchmark rates have been lowered by 10 basis points)

Analysis indicates that bank stocks demonstrating superior profit rebound potential and robust dividend capabilities in the current environment will be a quality choice to capture opportunities in this "new era."

(Ranking of dividend yields for Chinese banking sector H-shares and A-shares)