Summary of Key Points
In the second quarter of 2026, commercial banks' net interest margin (the difference between the interest they earn and the interest they pay) stabilized and increased for the first time in four years, rising slightly from 1.40% in the first quarter to 1.41%. This marks the end of a downward trend that has persisted since 2022, entering a phase of "volatility while bottoming out," although the increase is very modest. The reason for this turnaround is that banks have managed to reduce their costs on the liability side (debt financing), which offset the impact of declining returns on the asset side (loan earnings). In the future, it is unlikely that the interest margin will rebound significantly, and banks will need to adopt more sophisticated management practices and diversify their revenue sources to cope with long-term pressures.
1. The Significance of the Net Interest Margin Rebound
The net interest margin can be understood as the average profit rate obtained by banks from lending minus the cost of borrowing funds. For example, if you deposit $100 in a bank and receive 2% in interest, and the bank lends that money out for 5% in interest, the margin is 3%.
This figure has been on a downward trend since 2022, dropping to a low of 1.40% in the first quarter of 2026. The 0.01-percentage-point increase, although small, indicates that the continuous decline has temporarily come to an halt. It's similar to a stock price that stops falling after a prolonged period and begins to stabilize, suggesting that the worst may be over, but a rebound is not yet imminent. Markets had expected the margin to continue declining, so this result is somewhat surprising.
2. The Key Reason for the Rebound: Lower Cost of Borrowing
The main factor behind the rebound is the reduction in the cost of borrowing funds by banks. In recent years, many people deposited money in high-interest fixed-term deposits (with rates above 3%). As these deposits mature, they are being replaced by current low-interest deposits (around 2%). This reduction in interest payments means that banks have saved on their funding costs. For instance, if a bank has $100 billion in high-interest deposits maturing, switching to lower-interest loans could save hundreds of millions in annual interest expenses. This cost-saving effect will continue for several quarters as more high-interest deposits remain outstanding.
3. Limited Rebound: Declining Asset Returns
Despite the savings on borrowing costs, bank loan earnings have also been declining, largely offsetting these savings. Currently, there is weak demand for business and personal loans. Businesses are hesitant to expand production, and individuals are not interested in buying homes or cars, forcing banks to lower interest rates to attract customers (e.g., reducing mortgage rates from 5% to 4%). With lower loan earnings, even with reduced funding costs, the overall net interest margin has only increased slightly.
4. Future Trends: Limited Interest Margin Rebounds
Experts predict that the interest margin will not rebound significantly in the short term and may remain low in the long run:
- Persistent Challenges on the Asset Side: It will take time for credit demand to recover, and loan rates are likely to continue to fall, making it difficult for banks to improve their earnings.
- Banks' Response Strategies:
- Sophisticated Management: Banks need to optimize their deposit portfolio by reducing high-interest deposits and focusing on higher-returning loans (such as small business and consumer loans).
- Diversifying Non-Interest Revenue: Banks should rely less on interest margins and instead generate income from fees (e.g., credit card processing, commission from financial products) and investment returns.
In other words, banks cannot continue to rely solely on interest margins; they must adopt more conventional business models and diversify their revenue sources.
5. The "U-Shaped Curve" Theory
Wang Jian from Guosen Securities mentioned a potential "U-shaped impact": When market interest rates fall to a certain level, the net interest margin will stop declining and start to rise again. Banks will adjust their strategies, such as reducing low-interest loans and increasing investments in higher-yielding bonds or non-interest income sources. This is similar to how water levels will eventually stabilize after reaching a minimum depth. However, we have not yet reached the bottom of this U-shaped trend, so the net interest margin is still in the process of bottoming out.
In summary, the rebound in the net interest margin is a positive sign, but banks still face challenging times ahead. The transition from relying on scale-based profit growth to more sophisticated management and diversified revenue models will be a long-term process. For consumers, this may mean that deposit interest rates will not increase significantly, and loan rates may continue to decline, while banks will offer more financial products and services through credit cards and other channels.