(Yicai) Jan. 22 -- A new report by US investment giant Morgan Stanley offers an optimistic outlook on China's banking sector this year, describing it as “positive” and advising investors to focus on high-yield bank stocks.

The pressure on lenders’ net interest margins will be much less in 2025 compared with last year, and profitability levels will gradually stabilize, Xu Ran, Morgan Stanley's chief financial analyst for China, said in an interview with Yicai.

The government has said monetary policy will be “moderately loose” this year, but that does not necessarily imply major interest rate cuts, Xu noted, adding that in its third-quarter monetary policy report, the central bank said it would employ various means to steady net interest margins.

The focus will shift this year to reforms that allow interest rates to be determined more by market forces, Xu said. Although there may be reductions in the reserve requirement ratio and policy rates, loan pricing will become more market-driven, leading to a more moderate decline in loan yields, he noted.

Morgan Stanley predicts that the average loan yield and financing cost will both fall by 15 to 20 basis points, gradually helping to stabilize net interest margins at banks.

Long-term support policies and a cyclical bottoming-out are expected to help financial stocks outperform the market, it also said. Profits at major banks are projected to remain stable, with dividend yields of about 6 percent to 7 percent making large state-owned banks a safe investment choice.

However, commercial banks will still face global demand shocks, Morgan Stanley warned. If the United States imposes additional import tariffs, China's manufacturing sector could come under pressure. That may lead to a slowdown in manufacturing investment, which could accelerate the emergence of credit risk, it pointed out.

Xu noted that there would be more fiscal support to alleviate such pressures, and greater efficiency at in areas such as marketing are likely to lead to better credit cost management.

Regarding concerns that proposed capital injections into state-owned banks may dilute earnings per share, Xu said major state lenders are expected to stick to their current dividend payout ratios after the top-ups.

Editor: Tom Litting