Commentary: Policy Props Up China’s Bank Profits, but Asset Quality Worries Loom

The interim results for China’s banks in 2025 showed overall improvement in profit and revenue growth compared to the first quarter, reflecting a continued sector recovery. This performance was bolstered by a combination of stabilized net interest margins (NIMs), a rebound in capital markets, and reduced difficulty in attracting deposits. Financial “anti-involution” policies helped keep margins stable, while easing liability pressures and more active capital markets contributed positively. However, despite these improvements, there remain significant concerns about the underlying asset quality, with forward-looking indicators like the net NPL formation rate and the overdue loan ratio suggesting future risks, especially from the retail lending sector. While the headline non-performing loan (NPL) ratios appear stable, these secondary indicators point to latent stress in banks’ loan books, particularly in credit card, mortgage, and property sector corporate loans [para. 1].

Looking forward, banks are expected to see further improvement in operating metrics during the second half of the year, supported by the introduction of new fiscal tools—such as interest subsidies on consumer and service-sector loans and policy-based financial instruments—as well as buoyant capital markets. However, the overall trajectory of asset quality largely depends on a visible recovery in the broader real economy, focusing particularly on household cash flows and a revival in the property market [para. 2].

In terms of financial performance, listed banks reversed earlier declines, with net profit rising by 0.8% year-over-year in the first half of 2025—an improvement from a 1.1% drop in the first quarter. Second-quarter profit showed even more robust growth of 2.9%. Revenue improved across the board, growing 1.0% over the same period, an increase of 2.8 percentage points compared to the first quarter. However, banks increased their provisions in the second quarter for the first time since 2021, which negatively affected profit due to prudent asset-impairment policies [para. 3].

NIMs remained relatively steady, declining by only 1 basis point in the first half to 1.32%, a marked stabilization from a sharper 10-basis-point fall in the first quarter. This was the result of lower liability costs, driven by earlier deposit rate cuts and efforts to control funding costs through measures such as the elimination of manual interest supplements [para. 4].

Banks’ loan books grew by 8.0% year-over-year in the first half, with lending focused on sectors supported by government policy, such as manufacturing, small- and micro-enterprises, and technology firms. Deposits also grew 8.3%, representing a pick-up from the first quarter and contributing to eased liability pressure. Increased household risk appetite and the return of fixed-income products played a role in this trend [para. 5].

The improvement in capital markets translated to significant gains in non-interest income: Net fee income rose 3.1%, while other non-interest income jumped 10.7%. Unrealized gains in Other Comprehensive Income accounts are estimated to have contributed around 16% to net profit [para. 6].

Despite these positive trends, asset quality risks persist. The NPL ratio held at 1.23% in the second quarter, but overdue loans and net NPL formation rates continued to rise. Retail exposures showed particular vulnerability, with NPL ratios for credit cards and mortgages increasing, and the property sector’s NPL ratio reaching 4.1%. Provisions were strengthened, with the coverage ratio edging up to 238% [para. 7][para. 8].

Future improvement will depend on the success of fiscal initiatives, stabilization and recovery of NIMs, and the evolution of asset quality pressures in the face of ongoing macroeconomic uncertainties [para. 9][para. 10][para. 11].