Banks to outperform for sixth consecutive year in smooth, dedicated deleveraging process

Despite renewed concerns of a macro slowdown, we expect a dedicated and smooth deleveraging process over the next 12-18 months, which should support a continued gradual rebound in profit growth and further valuation recovery for major banks. Deleveraging reduces medium- and long-term risks and supports a gradual decline in credit costs over time, while promoting a more sustainable financial system and a recovery in both loan yields and bank ROEs, as both remain below levels that underpin long-term sustainable development. We forecast an approximately 50bp recovery in financial asset yields over the next three years, with potential upside to 70-80bp under our bull-case assumptions, which together with continued deposit-cost normalization should allow bank NIMs to stabilize and begin a modest recovery from 2026 onward. A decade of clean-up has reduced perceived high-risk financial assets from Rmb62tn (30.2% of total financial assets) in 2017 to around Rmb21tn (4.9%) in 2025, and we expec