Big Banks in China Are Preparing for a Margin Squeeze in H2

China’s biggest state-owned banks are signaling that net interest margins NIMs—a key profitability metric—will face mounting pressure in the second half of 2025. The outlook is grim: deflation, sluggish loan uptake, and weak economic demand have pushed margins to historic lows. ([Reuters][1], [Financial Times][2])

A Quick Overview

By the end of June, China's top five state banks reported a record-low average NIM of 1.42%, well beneath the 1.8% considered necessary for sustainable operations. ([Reuters][1]) Adding to that, the Financial Times reported Q2 margins averaging just 1.22%, with ICBC’s NIM plummeting to 1.16% ([Financial Times][2])

What’s Driving the Downturn?

1. Deflationary Pressures – Persistent price declines are shrinking yields, and low inflation—or occasional deflation—erodes the banks’ ability to maintain rates that preserve healthy spreads. ([Reuters][1], [Financial Times][2])

2. Weak Loan Demand – Consumers and businesses are pulling back from borrowing amid stagnant wages and economic uncertainty, limiting banks’ interest-earning opportunities. ([Financial Times][2], [Reuters][3])

3. Rising Consumer Defaults – Retail delinquencies are increasing sharply. ICBC’s non-performing consumer loans topped 11 billion RMB, with delinquency rates at 2.51% and credit card defaults at 3.75%.([Financial Times][2])

4. Policy Constraints – While Beijing encourages lending to revive consumption, such directives often come with compressed pricing, further squeezing margins. The industry averages operating under low-rate pressure remain.([Reuters][3], [Nai500][4], [Financial Times][2])

How Bank Leaders Are Responding

Executives are warning of sustained margin compression. The Bank of China’s President Zhang Hui acknowledged broad sectoral pressure but affirmed efforts to maintain stable performance. ([Reuters][5]) Bank of Communications warned that while margins will stay pressured, the pace of decline may slow. ([Reuters][5])

Impacts and Resilience

Banks are not going out of business despite the difficult margin environment. A \$72 billion recapitalization plan rolled out in March aims to stabilize the sector amid a prolonged earnings squeeze.([Reuters][1]) However, analysts caution that the sector now operates in a cycle of policy-driven lending followed by recapitalization—sustainable, but fragile. ([Reuters][1])

Conclusion

China’s top banks face a challenging road ahead. With net interest margins at multi-year lows, weaker loan demand, and rising defaults, profitability remains under threat. While capital injections offer temporary cover, the structural shifts suggest that thin margin dynamics may persist well into 2026. The industry’s resilience depends on better economic recovery, credit demand revival, and prudent policy calibration.

FAQ

Q1: What is a net interest margin NIM and why does it matter?

A: NIM is the difference between what banks earn on loans versus what they pay on deposits—critical for earnings. Historically, margins above 1.8% are seen as healthy; current levels near 1.2–1.4% strain profitability.([Reuters][1], [Financial Times][2])

Q2: Why are margins shrinking now?

A: Low interest rates, tepid loan demand, high consumer savings, and deflationary pressures are all driving down the spread banks earn on lending. ([Reuters][1], [Financial Times][2])

Q3: How are banks coping with rising defaults?

A: Banks are tightening lending, selling non-performing loans, and relying on government support like recapitalization to shore up balance sheets. ([Reuters][1], [Financial Times][2])

Q4: Will these pressures ease soon?

A: Analysts warn pressures may persist beyond 2026 unless consumer and property markets revive and policy finds a better balance between supporting growth and preserving bank health. ([Reuters][1], [mint][6])

Q5: What does this mean for ordinary customers?

A: Lending may remain tight, particularly for consumers. Banks may become more selective, and rates offered may not be favorable; resilient borrowers may benefit from targeted policy loans.