Buy bank stocks in the fourth quarter? Morgan Stanley: The first “naturally cyclical bottoming” without large-scale stimulus, China’s banking industry enters a new era.

Buy bank stocks in the fourth quarter? Morgan Stanley: The first “naturally cyclical bottoming” without large-scale stimulus, China’s banking industry enters a new era.

Morgan Stanley believes that after a seasonal adjustment in the third quarter, Chinese bank stocks will greet good investment opportunities in the fourth quarter and the first quarter of next year.

According to Zhuifeng Trading Desk, on October 20, Morgan Stanley Asia-Pacific analyst team published a research report pointing out that domestic bank stocks will soon finish a cyclical bottom in the third quarter. This is China's financial system's first "natural cyclical bottoming" achieved without large-scale stimulus policies—M1 growth rebound and improvement in industrial enterprise profits were both achieved without major stimulus.

The research report analyzes that upcoming dividend distributions in the fourth quarter, stabilized interest rates, support from the 500 billion yuan structural financial policy tool, and a more sustainable policy path will all support a re-rating of bank stocks.

Analysts pointed out that the past investment logic relying on strong stimulus has failed. The new focus should shift to high-quality banks that realize early and robust profit rebounds in a “natural clearing” environment.

First in history: "Natural cyclical bottoming" without large-scale stimulus

Morgan Stanley emphasizes that China's financial system is currently undergoing an unprecedented change: it has achieved a "natural cyclical bottoming" in the absence of large-scale stimulus and further monetary easing.

This indicates that risk clearing in the financial system is nearing its end, and the industry is shifting from a risk control model over the past decade toward a development model.Several signs confirm this observation:

Credit growth matches economic growth better: As of September 2025, the growth rate of aggregate social financing has slowed to 8.7%, and loan growth has slowed to 6.4%. This moderate growth is more compatible with nominal GDP growth, benefiting the stability of banks’ asset returns.

(In September, the growth rate of aggregate social financing slowed to 8.7%)Corporate liquidity and confidence improve: Since early 2025, the growth of M1 (narrow money) and corporate demand deposits has continued to accelerate. Historically, this is a positive signal for improved corporate liquidity and operating confidence, indicating risk is easing.

(Since early 2025, corporate deposits have continued to increase, especially demand deposits)Supply-side structural optimization showing effects: Guided by "anti-involution" policies, manufacturing capital expenditure growth slowed (from 6.2% in July down to 4.0% in September), with credit flows becoming more rational. This effectively eased overcapacity problems in some industries, and the spread between manufacturing fixed asset investment and industrial added value closed in September. As a result, despite a short-term slowdown in macro growth, industrial enterprise profits are gradually improving, and the year-on-year decline in PPI continues to narrow.

(PPI index remains stable month-on-month)

Farewell to "major ups and downs": China's banking sector enters a new era of steady development

The report asserts that China's financial sector has entered a relatively healthy long-term operating environment, and the re-rating of bank stocks will continue. The core driving forces are threefold:

Ongoing digestion of high-risk assets: By controlling fund inflows into overcapacity industries via market mechanisms, the scale of high-risk assets is steadily declining. Morgan Stanley projects that the proportion of high-risk assets to total credit will drop from 9.2% in 2024 to about 3% in the coming years. This will significantly reduce the risk premium for China’s financial stocks.

(Changes in high-risk assets)Moderate and stable credit demand: Policy no longer pursues credit "boom and bust" stimulation. Driven by technological innovation and industrial upgrading, credit demand will maintain a steady annual growth of 5-6% (slightly higher than the nominal GDP growth forecast of around 4%), sufficient to provide banks reasonable asset returns and stable net interest margins.Resident wealth shifting to bank stocks: As shadow banking faces strict regulation and the real estate bubble fades, alternative investment options for residents decrease. The substantial and still growing resident financial assets (reaching 297 trillion RMB as of Q2 2025) will continue to provide strong capital inflows to bank stocks.

Four main drivers for Q4 bank stock performance

The report sees four key factors jointly supporting bank stock performance in the fourth quarter:

Dividends drive fund inflows: Banks typically pay interim dividends at the end of December and early January, which attracts capital flows. Especially considering that residents’ financial assets have continued solid growth since 2022 (up 12% year-on-year to 297 trillion RMB in Q2 2025) and robust insurance product sales, the allocation demand from insurers and other institutions will be significant.

(In Q2 2025, the annual growth rate of Chinese household financial assets sped up to 12%, compared to 10.8% in Q1)Fundamentals reach an inflection point: Banks’ operating pressures are easing. The upcoming Q3 2025 results are expected to show that net interest margin (NIM) contraction pressure is mild (only a low-single-digit basis point sequential decline), while fee income continues to recover thanks to active capital markets. This will be an important signal to verify which banks can achieve profit recovery first.Policy support favors banks: The newly launched 500 billion RMB structural financial policy tool (as of October 17, 289 billion has been delivered) aims to supplement project capital, support credit demand, and avoids flooding banks with low-yield loans. This measure reduces the risk of economic downturn and further rate cuts.Interest rate environment stabilizing: If the Loan Prime Rate (LPR) remains stable for the rest of 2025, it will be another key catalyst for bank stocks. To date in 2025, both the one-year and five-year LPR have been cut by only 10 basis points, far less than the 35 and 60 basis points of 2024. Stable LPR signals stable loan and financial asset returns, easing concerns about ongoing net interest margin pressure.

(Since 2025, the one-year and five-year benchmark loan rates have each been lowered by 10 basis points)

Analysis points out that bank stocks showing stronger profit rebound potential and robust dividend capacity in the current environment will be the top picks for capturing the opportunities of this “new era.”

(Dividend yield ranking of Chinese banking sector H-shares and A-shares)

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