Newly released supervisory data from the National Financial Regulatory Administration for the second quarter of 2026 shows domestic commercial banks navigating a landscape marked by slightly elevated asset quality pressure, the first quarterly improvement in net interest margins in four years, and decelerating asset expansion. Specifically, the non-performing loan ratio edged up 0.01 percentage points quarter-on-quarter to 1.52%, while the net interest margin inched higher by 0.01 percentage points to 1.41%. With total asset growth slowing for two consecutive quarters alongside a continued decline in loan growth, the trend of "slower credit expansion with higher quality" is solidifying as the new norm. The growing emphasis on stabilizing net interest margins is imposing certain constraints on policy rate cuts.
Wang Yifeng, chief financial industry analyst at Everbright Securities, believes that under a monetary policy orientation geared toward "neutrality on interest margins," any adjustment to policy rates would entail a series of coordinated changes, making such a move relatively lower in priority. This approach would help maintain stability in the banking system's net interest margins.
NPL Ratio Edges Up
By the end of the first half of 2026, the non-performing loan ratio for commercial banks had risen compared with the end of the first quarter, with the share of special-mention loans also increasing. Data shows that at the end of the second quarter, normal loans totaled 241.5 trillion yuan, while non-performing loans amounted to 3.7 trillion yuan, an increase of 52.3 billion yuan from the previous quarter. The NPL ratio stood at 1.52%, up 0.01 percentage points from the end of the first quarter.
Broken down by bank type, the NPL ratios for large state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks were 1.21%, 1.23%, 1.87%, and 2.83%, respectively. Among these, state-owned banks saw a decline of 0.01 percentage points from the end of the first quarter, while joint-stock banks, city commercial banks, and rural commercial banks experienced increases of 0.01, 0.02, and 0.04 percentage points, respectively. Additionally, the share of special-mention loans rose to 2.21% at the end of the second quarter, up 0.04 percentage points from the end of the first quarter, signaling a marginal uptick in potential risk loans and heightened asset quality pressure.
Wang Jian, chief financial industry analyst at Guosen Securities, notes that asset quality indicators have deteriorated slightly on the margin, though the changes remain modest over a longer timeframe. A more critical indicator for assessing bank asset quality is the non-performing loan formation rate. Drawing on data from listed banks, the overall asset quality of the banking sector remains stable, with the NPL formation rate having held steady at around 0.7% for several consecutive years. However, banks currently face the issue of "loan impairment losses to NPL formation" falling below 100%, indicating insufficient provisioning. As a result, Wang Jian expects that, even with net interest margins stabilizing and revenue growth recovering, banks will prioritize replenishing provisions to address future uncertainties rather than using them to boost profit release. This may also explain why, despite stable net interest margins, the overall net profit growth of commercial banks continues to decline modestly.
In terms of profitability, commercial banks generated net profits of nearly 1.24 trillion yuan in the first half of 2026, down 0.57% year-on-year. At the end of the second quarter, the average return on capital stood at 7.72%, and the average return on assets was 0.58%.
Net Interest Margin Recovers Quarter-on-Quarter
Notably, the net interest margin for commercial banks showed signs of stabilization in the second quarter, marking the first quarterly sequential increase in four years. Data reveals that the NIM reached 1.41% in the second quarter, up 0.01 percentage points from the first quarter. Among bank categories, state-owned large banks, city commercial banks, private banks, and rural commercial banks reported NIMs of 1.31%, 1.4%, 3.63%, and 1.59%, respectively, each rising 0.02, 0.02, 0.01, and 0.01 percentage points from the first quarter. Joint-stock banks held steady at 1.54%, while foreign banks saw their NIM decline 0.02 percentage points to 1.28%.
The moderation in the decline of loan interest rates and improvements in liability-side costs jointly supported the sequential recovery in NIM. On the liability side, Wang Yifeng notes that the repricing of maturing high-cost deposits and tighter controls on broad interbank liability costs have effectively driven down interest expense rates, a trend that is expected to persist. However, given the limited room for further reductions in marginal liability costs, the pace of decline in liability costs is likely to slow. On the asset side, regulators have shown a strong inclination to "stabilize interest margins," with the self-regulatory mechanism leading efforts to "counter irrational competition" by setting floors on loan rates, which helps stabilize price levels.
Data indicates that newly issued loan rates remain at low levels. In June, the 1-year and 5-year-plus LPR stood at 3.0% and 3.5%, respectively, both unchanged year-on-year. The weighted average interest rate on new loans was 3.1%, down 0.2 percentage points year-on-year. Wang Jian believes that the stabilization of NIMs is primarily driven by improvements in liability costs resulting from the repricing of time deposits, which has allowed the decline in liability costs to keep pace with the drop in interest-earning asset yields. He expects NIMs to remain stable for the remainder of the year.
However, Wang Yifeng cautions that factors such as persistently weak effective credit demand, occasional substitution by low-yield bills, and declining reinvestment yields on existing bond assets will continue to exert downward pressure on asset-side yields. Looking ahead, the overall NIM for commercial banks in the second half of the year is expected to remain broadly stable or edge slightly lower.
The regulatory push to "stabilize interest margins" is imposing constraints on policy rate cuts. The central bank's monetary policy implementation report for the second quarter stated that next steps will involve "better leveraging the role of the market interest rate pricing self-regulatory mechanism, effectively implementing various interest rate self-regulatory initiatives, strengthening oversight of market behaviors that are irrational or could weaken monetary policy transmission, and maintaining market competition order. We will promote diversification in loan pricing benchmarks, continue to deepen the disclosure of comprehensive corporate loan financing costs, standardize credit market practices, reduce intermediary financing fees, and promote the low-level operation of overall social financing costs."
In Wang Yifeng's view, the current price of funds is already at a relatively low level and is not the core constraint on insufficient aggregate demand. If policy rates were to be cut, corresponding adjustments would be needed for LPR, the market benchmark DR, and deposit listing rates (including self-regulatory caps) to ensure the overall stability of the banking system. These actions require coordinated planning and involve a lengthy transmission chain, making them more suitable as a contingency plan should economic pressure intensify in the future.
Asset Growth Slows
Alongside the concurrent slowdown in loan growth, commercial banks have seen their total asset growth rate decelerate for two consecutive quarters. Data shows that at the end of the first half of 2026, the total asset growth rate for commercial banks had declined compared with the end of the first quarter. Specifically, total assets grew 7.5% year-on-year in the second quarter, down from 8.9% in the first quarter. By bank type, joint-stock banks saw a slight rebound in growth from a low base, while other categories experienced declines. State-owned large banks, city commercial banks, and rural commercial banks recorded year-on-year asset growth of 8.5%, 7%, and 3.5% in the second quarter, respectively, compared with 10.6%, 9.2%, and 4.3% in the first quarter.
The "slower credit expansion with higher quality" is emerging as a new norm in macroeconomic operations. The central bank's second-quarter monetary policy implementation report elaborated on this through a special column. The central bank stated that in recent years, capital-intensive sectors such as real estate and infrastructure construction have been undergoing continuous adjustments, while new quality productive forces are more asset-light, resulting in a corresponding decline in bank loans required per unit of economic growth and an inherent reduction in loan demand. Local government debt resolution and risk mitigation in small and medium-sized financial institutions are also impacting loans. Therefore, assessing financial support for the real economy should not rely solely on loans but should combine loans and bond financing for a comprehensive view.
From a market perspective, bank operations are currently characterized by "slowing scale and stabilizing interest margins," further validating the trend of "slower credit expansion with higher quality." Wang Jian believes that the slowdown in bank asset growth is not only a result of weak short-term credit demand but also a long-term trend. This year, commercial banks have faced subdued credit demand, making the modest decline in industry asset growth a normal phenomenon. He expects that asset growth in the sector will be unlikely to see a significant rebound in the future, remaining at current or even lower levels over the long term.
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