3Q26 Preview: Cautiously constructive; NIM and asset quality remain stable

A-/H-share banks under our coverage delivered 18%/23% returns in 3Q26, respectively. Heading into the 3Q26 reporting season, we remain cautiously constructive on sector fundamentals and maintain our 2H26 outlook. We expect NIM trends to remain broadly stable, with the pace of sequential improvement moderating as the incremental benefit from deposit repricing normalizes. Asset quality should also remain broadly stable, supported by higher provisioning and continued NPL disposal, while we expect NPL coverage ratios to remain largely unchanged.

Beyond core banking operations, we expect realization of unrealized bond gains to remain an important driver of earnings differentiation in 3Q26, with large banks relatively better positioned given their longer-duration bond portfolios. We also expect investor attention to increasingly focus on the implications of recent monetary and fiscal policy measures for NIM, credit growth and mortgage asset quality. We see limited near-term fundamental impac