Orient Securities·2026-03-15 02:30Investment Rating - The report maintains a "Positive" outlook for the banking sector in 2026 [6] Core Viewpoints - The banking sector is expected to return to a fundamental narrative in 2026, supported by policy financial tools and resilient asset expansion. The sector is currently in a deposit repricing cycle, which is likely to stabilize and improve net interest margins. Structural risks are anticipated to receive policy support [3][44] - The report suggests focusing on two main investment lines: 1) High-quality small and medium-sized banks with confirmed fundamentals, including Nanjing Bank (601009, Buy), Chongqing Rural Commercial Bank (601077, Buy), Ningbo Bank (002142, Buy), Shanghai Bank (601229, Not Rated), and Hangzhou Bank (600926, Buy); 2) State-owned large banks with stable fundamentals and good defensive value, including Bank of Communications (601328, Not Rated) and Industrial and Commercial Bank of China (601398, Not Rated) [3][47] Summary by Sections Understanding the Tightening of the Non-bank Interbank Deposit Rate Mechanism - The tightening of the non-bank interbank deposit rate mechanism aims to enhance the pricing constraints on deposits, thereby improving banks' liability costs. The mechanism extends to non-bank deposits, reinforcing the position of the 7-day OMO policy rate [13][14] - The previous mechanism, implemented in Q1 2025, included MPA assessments but had execution loopholes. The new tightening is expected to set limits on the proportion of interbank deposits priced above the 7-day reverse repo rate [15][19] Impact of the Strengthened Self-regulatory Mechanism on Interbank Certificates of Deposit - Following the implementation of the self-regulatory mechanism in November 2024, interbank certificate of deposit (CD) rates initially fell but are expected to stabilize as the market adjusts. The report anticipates that interbank CD rates will gradually decline to around 1.5% if market conditions remain stable [29][37] - The self-regulatory tightening is expected to exert downward pressure on interbank CD rates, with a potential reduction of approximately 5 basis points observed recently [29][38] Investment Recommendations - The report highlights the potential for absolute returns in the banking sector in 2026, driven by policy support and a favorable environment for asset expansion. It emphasizes the importance of monitoring deposit gaps and interbank CD issuance limits as key factors influencing supply and pricing [41][44]