Summary of Key Highlights for the Second Quarter of 2026
In the second quarter of 2026, the domestic banking sector exhibited three significant trends: a slight decline in asset quality (a modest increase in the non-performing loan ratio), the first quarterly increase in net interest margin in four years, and a continuous slowdown in asset growth. At the same time, regulatory efforts to stabilize the net interest margin have limited the priority of policy-based interest rate cuts, leading to a new normal where credit growth focuses on reducing speed while improving quality.
1. Slight Increase in the Non-Performing Loan Ratio: Overall Stability with Potential Risks
The non-performing loan ratio represents the proportion of loans that banks are unable to recover (for example, out of every 100 loans, 1.52 cannot be collected). This ratio increased slightly from 1.51% to 1.52% in the second quarter. However, several details deserve attention:
- Differences among Banks: State-owned large banks (such as ICBC and CCB) saw their non-performing loan ratios decrease by 0.01 percentage points (to 1.21%), while joint-stock banks, city commercial banks, and rural commercial banks all saw increases, especially the latter (from 2.79% to 2.83%), indicating greater asset quality pressures for smaller banks.
- Potential Risk Signals: The proportion of loans classified as "at risk" (likely to become non-performing) rose from 2.17% to 2.21%, suggesting that more loans may not be repaid in the future.
- Impact on Profitability: To cope with potential bad debts, banks need to set aside reserves for these losses. Currently, banks have insufficient reserve levels. As a result, even though the net interest margin has increased, they are prioritizing replenishing these reserves rather than distributing profits, leading to a year-on-year decrease in net profit of 0.57% (approximately 1.24 trillion yuan).
2. First Increase in Net Interest Margin in Four Years: Temporary Stability with Future Challenges
The net interest margin is the key to a bank's profitability—it is the difference between the interest earned from lending and the interest paid to depositors. In the second quarter, this ratio rose from 1.4% to 1.41%, marking the first quarterly increase in four years:
- Reasons for the Increase:
- On the debt side: Old, high-interest loans matured, replaced by new, low-interest ones, reducing banks' costs.
- On the asset side: Regulatory measures prevented banks from aggressively lowering loan rates to compete (by setting a lower limit on loan rates).
- Performance of Different Banks: State-owned large banks and city commercial banks saw increases in their net interest margins, while joint-stock banks remained unchanged, and foreign-funded banks experienced declines (due to fewer customers and greater competitive pressures).
- Future Challenges: Although the net interest margin is stable for now, it may decrease again in the future because demand for corporate loans remains weak. Banks will likely have to offer lower-interest loans, and bond investment returns are also declining, potentially leading to a slight decrease in the net interest margin in the second half of the year.
3. Slowing Asset Growth: Reducing Speed while Improving Quality Becomes the New Normal
Asset growth refers to the rate at which banks' total assets increase, reflecting the expansion of their lending activities. In the second quarter, bank total assets grew by 7.5% year-on-year, slower than the 8.9% in the first quarter:
- Differences among Banks: Only joint-stock banks (such as China Merchants Bank and Ping An Bank) saw a slight increase in growth due to a lower base from last year, while other banks experienced declines, with rural commercial banks having the slowest growth (3.5%).
- Reasons for the Decline:
- Long-term factors: The economy is shifting towards "new quality productivity" sectors (such as technology and green industries) that do not require as much borrowing as real estate and infrastructure projects.
- Short-term factors: Weak demand from businesses and individuals for loans.
- Policy factors: Local governments are working to reduce debt, and smaller banks are cautious about lending due to risk management concerns.
- Central Bank's Perspective: The central bank cannot rely solely on loan data; it must also consider other financing methods to assess the overall support of the financial system for the real economy.
4. Regulatory Focus on Stabilizing Net Interest Margins: Interest Rate Cuts Are Temporarily on Hold
Many hope that the central bank will cut interest rates (such as the LPR) to stimulate the economy, but current regulatory priorities are to stabilize the net interest margin to ensure banks' profitability. Therefore, interest rate cuts are not a top priority:
- Why Difficult to Cut Rates: Lowering rates involves adjusting multiple factors simultaneously, including the LPR, deposit rates, and market interest rates, which can be complex and may reduce bank profits.
- Analysts' Views: Interest rates are already quite low; the main issue for businesses is a lack of investment opportunities. Rate cuts will be reserved for times when economic pressure is greater, as a backup option.
Conclusion
The changes in the banking sector during the second quarter are inevitable consequences of an economic transition period. Banks are shifting from focusing on scale to improving quality, addressing short-term asset quality issues while adapting to long-term declines in credit demand. For individuals, deposit interest rates are unlikely to decrease significantly (as banks need to control costs), and loan rates for buying homes and cars will remain low. However, bank profit growth will slow down—this is a necessary part of the industry's transformation.