Summary of the Core Content
This news article focuses on the "net interest margin" of banks, which is a key indicator of their profitability (the difference between the interest earned from lending and the interest paid to depositors). However, in recent years, it has continuously declined to a historic low (1.4% in the first quarter of 2026), mainly due to factors such as lower loan interest rates, longer-term deposits, and increased competition among banks. A shrinking net interest margin not only reduces banks' profits but also affects their ability to accumulate capital and provide credit to the real economy. To address this issue, multiple parties need to work together: banks (of different sizes), regulatory authorities (to promote interest rate reforms), etc. This requires efforts on both the asset side (by engaging in high-quality businesses) and the liability side (by reducing deposit costs).
Detailed Analysis
1. What is the net interest margin, and why is it getting smaller?
The net interest margin essentially represents a bank's "profit margin." For example, if a bank charges 5% in interest on loans and pays 2% in interest on deposits, the difference of 3% (divided by the total amount of interest-generating assets) constitutes the net interest margin. However, this margin is currently decreasing for several reasons:
- Continuing decline in loan interest rates: To support the real economy, banks have been lowering their lending rates.
- Increasing trend towards longer-term deposits: Consumers prefer fixed-term deposits, which accounted for 73.4% of total deposits at the end of 2025 (up 9 percentage points from 2020). Since fixed-term deposits offer higher interest rates, banks face higher costs.
- Fierce competition among banks: Banks compete by offering high interest rates to attract deposits and lower loan rates to gain a competitive advantage, which compresses their profit margins. As a result, the net interest margin dropped from 1.69% in 2023 to 1.4% in the first quarter of 2026, reaching a record low.
2. The negative impacts of a shrinking net interest margin on banks and the economy
In the short term, banks earn less revenue because interest income constitutes more than 70% of their total earnings. In the long run, the consequences are more severe:
- Banks struggle to accumulate capital, making it difficult for them to expand credit.
- Lower profit margins can lower their credit ratings, making it more expensive and challenging for them to borrow from the market.
- Ultimately, banks may have to reduce lending, which makes it harder for businesses and individuals to obtain loans, creating a vicious cycle.
3. The asset side: Banks need to focus on high-quality business models and differentiation
To stabilize interest income, banks should engage in reliable operations and collaborate effectively:
- Focus on legitimate channels: Avoid high-risk lending practices (e.g., lending to companies with poor creditworthiness, which can lead to bad debts). Instead, they should target national strategic priorities (such as technology and green industries) and key sectors (e.g., small and micro enterprises). Although these businesses may not offer the highest interest rates, they are more stable and secure.
- Differences among bank sizes: Large banks (like ICBC and CCB) have ample capital and can undertake large-scale projects (e.g., high-speed railways and renewable energy facilities), acting as stabilizing forces in the financial system. Small and medium-sized banks (such as city commercial and rural banks) can focus on local markets, providing tailored products and services to specific customer groups (e.g., supply chain finance), thereby earning stable profits with smaller investments.
4. The liability side: Reducing deposit costs and promoting interest rate reforms
The liability side refers to the costs associated with attracting deposits. To lower these costs, banks need to take two approaches:
- Adjust their deposit portfolio: Reduce the proportion of long-term fixed-term deposits (which offer higher interest rates) and control the scale of structured deposits. They should also reduce reliance on costly interbank borrowing.
- Regulatory support for interest rate reforms: Currently, loan rates are linked to market rates (LPR), but deposit rates are not fully market-based. In the future, the "benchmark" deposit rate should be aligned with market rates so that deposit interest rates adjust in conjunction with loan rates. This will prevent banks from being negatively impacted by situations where loan rates fall while deposit rates remain unchanged, and it will also curb excessive competition for deposits.
5. Collaborative efforts to address the net interest margin issue
Solving this problem requires the joint effort of various parties:
- Regulatory authorities: When evaluating banks, they should provide flexibility rather than imposing overly strict requirements. They should promote the integration of deposit rates with market rates to ensure smoother transmission of monetary policy.
- Large banks: Leverage their resources to support national strategic initiatives and lead in reducing long-term deposit interest rates.
- Small banks: Focus on local markets and specialized areas, offering tailored products and services to build a competitive advantage.
By breaking down the issue in this way, it becomes easier for the general public to understand the nature of the net interest margin problem, its impact on the financial system, and the necessary solutions.