The National Financial Regulatory Administration has released key supervisory indicators for commercial banks in the second quarter of 2026. Net profit for the industry in the first half of 2026 declined by a slight 0.6% year-on-year. This was accompanied by a modest slowdown in asset growth, a clear stabilization of the net interest margin, and minimal changes in asset quality metrics such as the non-performing loan ratio, special-mention loan ratio, and provision coverage ratio.
Guosen Securities believes that the current signs of the net interest margin bottoming out are evident. The firm maintains its judgment that the performance of listed banks is building a base and will see marginal improvement. However, it notes that with income pressure significantly alleviated, listed banks are expected to prioritize increasing provision buffers over releasing profits. Consequently, the rebound in profit growth this year is anticipated to be smaller than the rebound in income growth, with the net profit attributable to parent companies of listed banks projected to see only a modest improvement.
Industry Net Profit Slightly Down, Narrowing Decline from Q1
Commercial banks achieved a net profit of 1.24 trillion yuan in the first half of 2026, a 0.6% year-on-year decrease, marking a narrower decline compared to the first quarter. By bank type, large banks and city commercial banks saw net profit increases of 1.6% and 7.4% year-on-year, respectively, while joint-stock banks and rural commercial banks experienced declines of 3.4% and 12.6%, respectively. Due to limited disclosure of regulatory indicators, it is difficult to decompose the specific factors driving net profit growth. However, based on the first-quarter reports of listed banks, the change in net profit growth is still primarily attributed to the stabilization of the net interest margin. With reduced income pressure, banks may have increased provision buffers to address future uncertainties, leading to a persistently low profit growth rate. For the full year, Guosen Securities expects that the overall income growth of listed banks will recover from last year, benefiting from a stable net interest margin. However, increased provision efforts will result in a smaller rebound in net profit growth compared to the income growth recovery.
Asset Growth Rate Slows Slightly
The total assets of the entire industry grew by 7.5% year-on-year in the second quarter of 2026, a slight slowdown. By bank type, joint-stock banks saw a slight increase in growth from a low base, while growth rates for all other types of banks declined. The slowdown in asset growth is influenced not only by weak short-term credit demand but also represents a long-term trend. This year, commercial banks have faced weak credit demand, making the slight moderation in asset growth a normal phenomenon. However, it is also important to recognize this as a long-term trend. The central bank's latest second-quarter monetary policy report noted that "in recent years, capital-intensive industries such as real estate and infrastructure have been undergoing adjustment, while new productive forces are lighter, naturally reducing loan demand." This shift in economic structure and transformation indicates a long-term trend, and Guosen Securities expects that the industry's asset growth rate will find it difficult to see a significant rebound, likely remaining at current or even lower levels for an extended period.
Net Interest Margin Stabilizes
The industry's net interest margin for the second quarter of 2026 was 1.41%, a slight increase of 1 basis point from the first quarter and a decrease of 1 basis point from the fourth quarter of 2025. Overall, there are clear signs of stabilization. By bank type, the net interest margin across all types of banks has stabilized. The stabilization is primarily due to the improvement in liability costs from the repricing of time deposits, allowing the decline in bank liability costs to catch up with the decline in the yield on interest-earning assets. Guosen Securities expects the net interest margin for commercial banks to remain stable within the year.
Asset Quality Metrics Show Little Change
Asset quality indicators have slightly deteriorated on a marginal basis, but the changes are not significant over a longer timeframe. As of the end of the second quarter of 2026, the industry's non-performing loan ratio stood at 1.52%, an increase of 1 basis point from the end of the first quarter. The special-mention loan ratio was 2.21%, up 4 basis points from the end of the first quarter. The provision coverage ratio was 203%, unchanged from the end of the first quarter. By bank type, the non-performing loan ratio for city commercial banks showed a slight upward trend, while other types of banks remained relatively stable. Provision coverage ratios across all types of banks were also stable. A more core indicator for assessing bank asset quality is the non-performing loan formation rate. Based on data from listed banks, overall asset quality is stable, with the non-performing loan formation rate having remained at around 0.7% for several consecutive years. However, the current issue facing banks is that the "loan impairment losses / non-performing loan formation" is below 100%, indicating insufficient provision buffers. Therefore, Guosen Securities expects that with the net interest margin stabilizing and income growth recovering, banks will still prioritize supplementing provisions to address future uncertainties rather than immediately releasing profits. The firm believes this is also the reason why the overall net profit growth of commercial banks is still slightly declining despite the stabilization of the net interest margin.
Investment Advice
Guosen Securities maintains its judgment that the performance of listed banks in 2026 will build a base and improve marginally, with the core reason being the benefit of a stable net interest margin. The firm therefore maintains its "Outperform" rating for the industry. It continues to recommend a dual-track strategy focusing on "stable dividend stocks" and "high-performing city commercial banks." Within the stable dividend track, it recommends China Merchants Bank Co., Ltd. as a key pick. Within the high-performing stock track, it recommends Bank of Ningbo Co., Ltd.
Risk Warning
If the macroeconomy experiences a significant downturn, it could impact the banking industry in various ways. For example, monetary policy easing during an economic downturn could negatively affect the net interest margin, and a decline in borrowers' repayment ability during a macroeconomic downturn could adversely affect bank asset quality.
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