Summary of Key Points
In the first half of 2026, commercial banks saw an overall recovery in revenue, but there was a clear divergence within the industry: corporate loans were the main driver of growth, while retail loans continued to decline. The reduction in borrowing costs supported revenue, but the increase in bad debts from retail business dragged down profits for some banks. Overall, capital levels were sufficient, but smaller and medium-sized banks (especially those relying on retail services) faced significant capital pressures, and the risks associated with the mixed capital instruments they issued required caution.
Detailed Analysis
1. Divergent Loan Structures: Business Loans Booming, Retail Loans Slowing
Bank loans are primarily divided into two categories: corporate loans (for businesses) and retail loans (such as mortgages and consumer loans). In the first half of 2026, corporate loans increased by 8.26% year-on-year, while retail loans have been in negative growth for four consecutive months (a decrease of 1.42% in June). Why? On the consumer side, economic recovery is slow, leading to lower demand for mortgages and consumer loans; on the business side, companies may need funds for turnover or expansion, resulting in increased borrowing. This is a critical issue for regional banks that rely heavily on retail services—these banks, which primarily serve individuals, are now facing limited growth opportunities.
2. The Key to Revenue Recovery: Lowering Deposit Interest Rates
Banks earn profits through the "interest margin"—the difference between the interest they charge on loans and the interest they pay on deposits. In the first quarter of 2026, the revenue of listed banks increased by an average of 7.29%, a significant improvement from nearly zero growth in the same period last year. This was due to lower deposit interest rates. Since 2024, banks have gradually reduced deposit rates, and by the first quarter of 2026, interest expenses had decreased by 9.92% year-on-year, saving a substantial amount of money. Although loan interest rates did not increase significantly, the stable interest margin helped boost revenue.
3. Profit Pressure from Rising Bad Debts
Despite revenue recovery, profits were not as strong. In the first quarter of 2026, the "bad debt provisions" (for credit losses) of listed banks increased by 33.67% year-on-year. This is because more retail loans turned into bad debts—more people failed to repay their mortgages and consumer loans, forcing banks to set aside additional funds for these losses. Additionally, banks had to write off these bad debts, with a total of 327.2 billion yuan written off in the first quarter, an increase of 36.7 billion yuan from the previous year. These expenses eroded profits and weakened their ability to replenish capital.
4. Major Challenges for Smaller and Medium-Sized Banks
Overall, banks have sufficient capital, but smaller and medium-sized banks (particularly regional banks) are in a difficult position. They rely on retail services, which result in higher bad debt levels and lower profits, limiting their ability to generate internal capital. For example, some small and medium-sized banks failed to redeem their "secondary capital bonds" (bonds used to supplement capital), indicating a lack of financial strength. As of July 2026, 76 secondary capital bonds from 58 regional banks across the country had not been redeemed, with a remaining balance of over 34 billion yuan, especially in regions like Shandong, Liaoning, and Hubei. These bonds carry high risks; if a bank encounters problems, the bond value could be reduced or converted into bank shares, resulting in losses for investors.
5. Overall Risks Are Controllable, but Caution Is Needed for Certain Banks
The liquidity of the entire banking industry is not an issue—deposits exceed loans, and liquidity indicators far exceed regulatory requirements. However, individual bonds issued by smaller and medium-sized banks should be carefully monitored. Banks that do not redeem their secondary capital bonds are at higher risk, and investors need to assess the true creditworthiness of these institutions before investing in their mixed capital instruments.
Conclusion
In 2026, the banking industry has seen mixed outcomes: large state-owned banks and leading commercial banks have maintained stable growth through corporate loans, while regional small and medium-sized banks face challenges due to high bad debt levels and tight capital constraints. Investors should avoid bonds issued by banks that do not redeem their secondary capital bonds to minimize potential risks. Given the slow economic recovery, the divergence within the banking sector is likely to continue.