Cathay Pacific Haitong: Debt management capacity may be the key to performance differentiation, and the decline in bank net interest spreads in '26 is expected to be 5bp
The Zhitong Finance App learned that Cathay Pacific Haitong released a research report saying that the improvement in debt costs increased markedly in 2025, with debt costs falling 28 bps in the first half of the year (down only 4 bps in the same period last year). Among them, improvements in deposit and interbank debt costs contributed 19 bps and 7 bps respectively. The cost of interbank debt has improved markedly compared to previous years. On the one hand, it has benefited from the interbank demand deposit interest rate self-regulation mechanism. On the other hand, banks also control the pace and term of issuing interbank deposits while the liquidity gap is relatively manageable, supporting the cost improvement. Looking ahead to 2026, bank interest spreads are expected to drop by around 5 bp. The downward pressure continues to ease marginally, and interest spreads of some banks are expected to bottom out and stabilize.
Cathay Pacific Haitong's main views are as follows:
Debt side: Increased deposit maturity ratio, repricing dividends underpinned interest spread performance
1) Term structure: Long-term deposits have entered the repricing cycle one after another. In addition, banks have stepped up active debt management efforts in recent years. The share of 1-5 years of remaining deposit periods has reached a downward inflection point since 2024. The share of 1-5 year deposits at the end of 25q2 fell 1.5pct to 22.6% compared to the end of 24q2, and banks such as Ningbo, Chongqing, and Changshu declined by more than 10 pcts. Considering that the peak of fixed deposits was added from 2022 to 2023 ($12.5 trillion was added to fixed deposits in 23Q1, an increase of 3.7 trillion dollars over the previous year), it is expected that the maturity scale and ratio of deposits in 2026 will be even more significant.
Furthermore, the trend of high growth in time deposits has abated. The share of time deposits increased by less than 1% in the first ten months of this year, which is a marked decrease from previous years. As the money-making effect of the capital market continues to show, and driven by residents' demand for diversified asset allocation, deposits are expected to show a trend of revitalization.
2) Price factors: On the one hand, the governance level has paid more attention to maintaining a reasonable level of bank interest spreads. The 25Q1 monetary policy report “reduces bank debt costs” before “driving down the cost of comprehensive social financing”. Interest rates were cut in May this year, and long-term interest rates on deposits fell more than on loans. It is expected that subsequent interest rate cuts will maintain this combination. The combined effect of the reduction in interest rates on deposits and loans had no negative immediate impact on net interest spreads, and the “policy bottom” of net interest spreads may have already been revealed.
On the other hand, long-term deposits are re-priced after the listing interest rate has been lowered several times, and the cost saving effect is even more obvious. The biggest drop in three-year deposits is expected to be 100 bp or more. Use the difference between time deposit stock costs and (deposit listing interest rate+points) to compare the deposit cost improvement space of various banks. For example, there may be a lot of room for improvement under the cost of Chongqing, CCB, Jiangsu, Nanjing, etc.
Asset side: The downward pressure on yields may be significantly better than in 2025
1) Loans: The pressure of heavy pricing has eased (the 5-year LPR drop in 2025 was 10 bps, 50 bps less than last year), compounded by a slowing decline in interest rates on newly issued loans, and the continuing narrowing of the spread between interest rates on existing loans and interest rates on newly issued loans. The subsequent decline in loan interest rates is expected to be limited.
2) Debt conversion: After debt replacement, the interest rate on legal debt will be significantly lower than the interest rate on hidden debt. The return on related assets is expected to decline. The drag on net interest spreads of listed banks is estimated to be about 4 bps.
3) Bond maturity: Interest rates on newly issued bonds have shown a rapid downward trend in recent years, and the price difference with the yield on bank stock bonds has increased markedly. Along with the need to hold bank bonds at maturity and reallocate existing bonds to redeem earnings, the return on investment in bank bonds will also face downward pressure. It is estimated that the reallocation of maturing bonds within 1 year will drag down interest spreads by about 6 bps.
Net interest spread outlook: the decline is expected to be 5 bps in 2026
1) The decline in asset-side yield is expected to be 17 bps. Looking at the breakdown, repricing of loans, and redistribution of maturing bonds will drag down asset-side returns by 4 bps, 4 bps, and 6 bps respectively; 2) The debt-side cost ratio improvement is expected to be 13 bps, of which deposit cost improvement is 17 bps.
Risk Alerts
Demand for credit was weaker than expected; LPR was drastically lowered; deposit periodization intensified.