The persistent narrowing of net interest margins (NIM) has emerged as a central challenge to Chinese banks' profitability and valuation in recent years. This trend, driven by deepening interest rate liberalization, multiple LPR cuts, and macroeconomic shifts, has raised profound concerns about the banking system's stability. However, disclosures from listed banks suggest this multi-year downward pressure may be approaching its conclusion, with critical inflection points emerging.
On October 28, Bank of China (601988.SH) reported a stabilized NIM of 1.26% for Q3 2025, matching H1 levels. This stabilization isn't isolated—regional lenders like Bank of Ningbo (002142.SZ) and Jiangyin Bank (002807.SZ) also reported flat or slightly improved margins. These cases collectively indicate the sector may be finding a cyclical bottom after systemic repricing shocks and intense liability cost competition.
The Q3 2025 period serves as a crucial observation point. Bank of China's NIM stabilization at 1.26% halted a continuous decline since H1 2023 (1.67%). Jiangyin Bank reported a 2bps quarter-over-quarter NIM increase to 1.56%, crediting optimized asset-liability structures. Bank of Ningbo maintained its industry-leading 1.76% NIM, while Chongqing Rural Commercial Bank (601077.SH) saw merely a 0.01pp decline to 1.59%. This stabilization across state-owned, joint-stock, and regional banks provides compelling evidence of sector-wide margin normalization.
This equilibrium reflects dynamic adjustments on both asset and liability sides. On assets, Fitch Ratings' Asia-Pacific financial institutions director Xue Huru notes moderated pricing pressure, with shrinking LPR cuts reducing repricing impacts. Banks are rebalancing portfolios—Bank of China's 11.71% corporate loan growth (versus 0.56% retail) helps stabilize yields through better risk pricing.
Liability-side improvements stem from effective deposit cost controls. High-cost term deposits are maturing and being repriced at lower rates, as seen in Bank of China's shifting deposit mix (3.68% corporate vs 8.49% retail growth). Concurrently, banks are accelerating business model transitions toward non-interest income. Bank of China reported 16.20% non-interest income growth to RMB165.41 billion, now representing 33.67% of revenue—a structural shift from pure spread dependence to "spread + fee" dual engines.
However, challenges remain. At 1.26%, Bank of China's NIM remains below historical and international peers. Economic recovery strength will crucially impact credit demand and asset quality, while persistent deposit term preferences continue pressuring liability costs. Fitch anticipates gradual NIM stabilization through 2026 as deposit rate cuts take effect, though significant rebounds appear unlikely.
The sector faces intensified differentiation, with leaders emerging through superior liability management, non-interest business development, and risk pricing capabilities. Rather than expecting V-shaped profit recoveries, the industry should view this stabilization as a strategic window for transitioning toward sustainable, high-quality development—ultimately contingent on fundamentally improved risk management and real economy service efficiency.
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