The former 'king of retail banking' in China is facing one of its most severe performance tests in recent years.
An analysis of the 2025 financial results for China Merchants Bank Co.,Ltd. (SH: 600036/HK: 03968) shows the bank achieved annual operating income of 3.37532 trillion yuan, a year-on-year increase of just 0.01%, nearly zero growth. Net profit attributable to shareholders was 1.50181 trillion yuan, up 1.21% year-on-year.
While both revenue and profit returned to growth, core profitability metrics continued to deteriorate.
The most concerning indicator for the market is the net interest margin. In 2025, the bank's net interest margin was only 1.87%, down 11 basis points year-on-year, marking the third consecutive year of decline. Compared to the 2.15% recorded in 2023, this key metric has shrunk by 28 basis points.
The net interest spread also narrowed simultaneously to 1.78%, a decrease of 8 basis points.
The bank attributed this in its annual report to the combined effects of the previous year's reduction in existing mortgage rates, a decline in the Loan Prime Rate (LPR), and insufficient effective credit demand, which led to a continued downward trend in the pricing of new loans and a lower average loan yield. Additionally, the persistent decline in the market interest rate center dragged down the yields on market-oriented assets such as bond investments, interbank activities, and bill discounting.
More challenging is that liability costs did not improve as significantly as expected.
Although the average cost rate of customer deposits decreased from 1.54% in 2024 to 1.17%, the proportion of demand deposits declined further. By the end of 2025, demand deposits accounted for 50.79% of total customer deposits, down 1.45 percentage points from the end of the previous year.
The bank stated that as market expectations have not yet fully recovered, corporate fund activation remained insufficient throughout the year, and customer demand for time deposits remained high, leading to a year-on-year decline in the proportion of demand deposits.
Typically, when returns from investments in stocks, property, or funds are poor or volatile, funds tend to flow back into bank deposits. However, to secure slightly higher returns than those offered by demand deposits, people prefer time deposits. This indicates a lack of high-quality, low-risk assets with moderate returns in the market.
The decline in the demand deposit ratio means an increase in the share of time deposits. For banks, time deposits carry higher interest costs, which pushes up liability-side expenses, compresses the net interest margin, and impacts profitability.
Retail Credit: Non-Performing Loans and Ratios Both Rise
A dissection of the annual report reveals that the retail financial business, long considered the bank's competitive moat, is facing pressure from deteriorating asset quality.
The report shows that as of the end of 2025, the balance of retail loans was 3.72 trillion yuan, a mere increase of 2.07% from the end of the previous year. The balance of non-performing retail loans was 39.584 billion yuan, an increase of 4.449 billion yuan. The non-performing loan ratio for retail stood at 1.06%, up 0.10 percentage points.
Within this, the non-performing ratio for small and micro enterprise loans jumped from 0.79% to 1.22%, a rise of 43 basis points. The non-performing ratio for consumer loans was 1.02%, slightly down by 0.02 percentage points, but both the special-mention and overdue ratios increased. The non-performing ratio for credit card loans remained high at 1.74%, and the special-mention loan ratio was as high as 4.81%, up 0.64 percentage points year-on-year, potentially indicating future migration risks.
While asset quality is under pressure, the bank's risk absorption capacity is also weakening.
At the end of 2025, China Merchants Bank's provision coverage ratio fell to 391.79%, dropping below the 400% mark for the first time in nearly four years, a significant decrease of 20.19 percentage points year-on-year. The loan provision ratio also declined by 0.24 percentage points to 3.68%.
A decline of over 20% in one year marks the fastest rate in nearly five years. If this trend continues, the bank's provision coverage ratio could fall below 350% within two years, potentially losing its buffer capacity against the retail credit cycle.
The direct reason for the drop in provisions is the reduction in the balance of loan loss provisions. The annual report shows that last year, the bank's loan loss provision balance was 267.222 billion yuan, a decrease of 3.079 billion yuan from the end of the previous year.
Simultaneously, the bank wrote off a substantial 56.067 billion yuan in non-performing loans for the full year, an increase of approximately 3 billion yuan year-on-year.
This indicates that the bank did not make sufficient provisions to cover the bad debts written off during the period but instead drew down on previously accumulated provisions.
Typically, in an environment of slowing revenue growth and narrowing interest margins, this is a common profit management technique: reducing credit impairment losses directly boosts current-period profits.
Collectively, these data points suggest that the bank faced pressure on its true asset quality last year. It accelerated write-offs to clean up its balance sheet and, leveraging its substantial provision buffer, actively reduced current-period provision accruals to support its profit performance.
While this is an active financial strategy, it also necessitates ongoing attention to whether the rate of new non-performing loan formation will continue to rise and the pace of provision consumption.
Another noteworthy signal is the decline in capital adequacy levels.
As of the end of 2025, under the advanced approach, the bank's core tier 1 capital adequacy ratio was 14.16%, the tier 1 capital adequacy ratio was 16.51%, and the total capital adequacy ratio was 18.24%, down by 0.70, 0.97, and 0.81 percentage points respectively from the end of the previous year.
The bank explained in its report that while risk-weighted assets grew steadily, the capital adequacy ratios at all levels declined due to the impact of the 2025 interim dividend and a decrease in other comprehensive income.
Frequent Regulatory Penalties Signal Rising Compliance Pressure
Beyond financial metric pressures, the bank's internal control and compliance issues have continued to surface.
According to statistics from publicly available regulatory information, from January 1, 2025, to May 28, 2026, China Merchants Bank and its branches cumulatively received approximately 45 penalty notices, with total fines exceeding 27.7 million yuan. Violations were mainly concentrated in areas such as imprudent credit business management, foreign exchange regulation breaches, anti-money laundering failures, and non-compliant regulatory data reporting. Notably, 2025 saw eight penalty notices with fines exceeding one million yuan each.
2025 was a particularly severe year for penalties, with around 30 notices and fines totaling over 25.7 million yuan. Major penalties included: a 3 million yuan fine for the Hangzhou branch due to inadequate loan due diligence; a fine of approximately 2.91 million yuan for the Jinan branch for violations including improper bill discounting and issuing credit loans to related parties; and a 2.6 million yuan fine for the Kunming branch for statistical data discrepancies and illegal fee charges. Additionally, the Urumqi and Kunming branches were fined 500,000 yuan and 1.0494 million yuan respectively for foreign exchange business violations.
Entering 2026, regulatory scrutiny has intensified, with penalty types becoming more diverse. The Hefei branch was fined 1.4769 million yuan for violations including breaches of financial statistics regulations, counterfeit currency regulations, and inadequate customer due diligence. The Foshan branch received a 600,000 yuan fine for inadequate due diligence on individual business loans. Branches in Zhengzhou, Changzhou, Lanzhou, and Qingdao were fined amounts ranging from 300,000 to 380,000 yuan for issues such as data misreporting, poor post-loan management, and anti-money laundering violations.
As the bank approaches the release of its interim report, whether new data will show effective resolution of asset quality and compliance issues remains to be seen.
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