In the past quarter, Chinese banks have been down trending. This pull back is happening on the backdrop of a substantial rally since 2021. The rise had been largely driven by government support and reduction in liquidity ratio. However, with the lowered interest, there is a strong fear of margin pressure and inability of the Chinese banks to make money.
Furthermore, according to S&P Global Ratings, China’s banks are facing a “Japanification moment,” as years of low lending margins and policy-driven concessions have weakened profitability and increased exposure to credit risks. Unlike other banking systems that offset ultra-low rates by diversifying revenue, Chinese banks have fewer options and remain reliant on minimizing credit losses.
Below are a couple of reasons that kept investors on their toes when investing in Chinese banks:
Structural Deceleration of Credit
- The banking system is flush with liquidity due to PBOC easing (LPR, RRR cuts), but private credit demand remains weak because of low corporate confidence, the real estate slump, and geopolitical uncertainty
- Loan growth is tepid (new RMB loans up only 2.3% YoY in 1H25), while government bond issuance dominates Total Social Financing growth (91% of increase)
Profitability Erosion (NIM Squeeze)
- Policy-driven rate cuts keep borrowing cheap but compress banks’ net interest margins to historic lows (1.25–1.39%)
- Returns on assets/equity are sliding
Quasi-Fiscalization of Banks
- Banks are channels for state-directed credit allocation (LGFVs, infrastructure, micro & small enterprises)
- This crowds out organic, private lending and saddles banks with lower-return, higher-risk exposures
Hidden Asset Quality Risks
- Headline NPL ratio (1.49%) looks stable, but special-mention loans (RMB 5T) and massive LGFV debt exposure (20–25% of loans) signal rising future stress
- State-directed bailouts shift these risks onto the balance sheets of large SOE banks, undermining profitability
However, we don’t see near term implications on Chinese banks. This stems from its resilient financials. Firstly, their capital adequacy ratio is above their threshold. Furthermore, these banks have room to raise more capital to fund their operations. While not all banks provide details on how much they can raise, ICBC, the largest bank in the world by asset, still has more than 150 billion yuan to raise for Tier 2 capital which provides substantial room for financial maneuvers.
| Bank | Capital Adequacy Ratio (CAR) | Non-Performing Loan (NPL) Ratio | Tier 2 Capital (T2C) (in millions of RMB) | Room for Capital Raising for Tier 2 Capital |
| Agricultural Bank of China (ABC) | 18.19% | 1.30% | 1,030,789 (Net Capital) | Not explicitly stated |
| China Construction Bank (CCB) | 19.69% | 1.34% | 978,839 (After regulatory adjustments) | Not explicitly stated |
| Industrial and Commercial Bank of China (ICBC) | 19.39% | 1.34% | 1,037,078 (Net Capital) | Remaining approved quota of RMB150.0 billion (calculated from RMB240.0 billion approval). |
| Bank of China (BOC) | 18.76% | 1.25% | 842,286 (Net Capital derived) | Not explicitly stated |
Overall, the rally of banks has been driven by state policy rather than organic growth, as seen by the muted growth of these 4 banks in the past 5 years. Furthermore, net interest margin has been falling. Nevertheless, risk management has been improving through decreasing NPL and maximizing capital adequacy across its Tier 1 and Tier 2 capitals. Lastly, interbank ratio has been falling, which could signal lesser interbank lending and there is enough liquidity from PBOC’s supportive measures. The 6 graphs created below seek to portray a general overview of performance of the banks across its financial statements.
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| Industry Sector | ABC (Corporate Loans: RMB 16,025,807 million) | CCB (Domestic Corp. Loans: RMB 14,434,401 million) | ICBC (Domestic Corp. Loans: RMB 16,204,933 million) | BOC (Chinese Mainland Corp. Loans: RMB 12,466,309 million) |
| Transportation, Storage, and Postal Services | 3,043,610 (18.9%) | 2,389,026 (16.55%) | 3,859,790 (23.8%) | 2,227,840 (17.87%) |
| Manufacturing | 2,694,054 (16.8%) | 2,172,903 (15.05%) | 2,454,489 (15.1%) | 2,732,283 (21.92%) |
| Leasing and Commercial Services | 2,380,813 (14.9%) | 2,616,609 (18.13%) | 2,417,060 (14.9%) | (Included in Commerce & Services) |
| Production and Supply of Electricity, Heating, Gas, and Water | 1,677,005 (10.5%) | 1,600,664 (11.09%) | 1,756,221 (10.8%) | 1,272,285 (10.21%) |
| Wholesale and Retail Trade | 1,315,312 (8.2%) | 1,393,050 (9.65%) | 768,713 (4.7%) | (Included in Commerce & Services) |
| Water, Environment, and Public Utility Management | 1,269,111 (7.9%) | 761,752 (5.28%) | 1,839,421 (11.4%) | 476,392 (3.82%) |
| Finance (excluding banking book) | 1,109,225 (6.9%) | 530,770 (3.68%) | N/A (reported in Others) | 538,497 (4.32%) |
| Real Estate | 913,134 (5.7%) | 908,380 (6.29%) | 880,986 (5.4%) | 967,297 (7.76%) |
| Construction | 569,371 (3.6%) | 699,150 (4.84%) | 483,623 (3.0%) | 493,051 (3.96%) |
| Mining | 308,667 (1.9%) | 344,654 (2.39%) | 328,337 (2.0%) | 259,771 (2.08%) |
| Science, Education, Culture, Sanitation | N/A (Included in Others) | (Included in Others) | 400,666 (2.5%) | (Included in Commerce & Services) |
| Commerce and Services (BOC grouping) | N/A | N/A | N/A | 3,184,738 (25.55%) |
| Others/Unspecified | 745,505 (4.7%) | 1,017,443 (7.05%) | 1,015,627 (6.4%) | 86,948 (0.70%) |
Real Estate’s Weight on Financial Performance and Asset Quality (2024)
The real estate downturn forced banks to adopt more proactive risk management, but asset quality indicators remained broadly stable. Real estate loans constituted a contained share of corporate portfolios, ranging from 5.4% at ICBC to 7.76% at BOC. CCB reported RMB 908,380 million in real estate loans, a 6.37% increase over 2023, while ICBC’s exposure rose to RMB 118,760 million (15.6%), largely tied to rental housing and whitelisted projects. On the retail side, residential mortgages continued to dominate personal lending, often exceeding two-thirds of total retail portfolios. ABC’s residential mortgage NPL ratio stood at just 0.73%, well below its overall group ratio of 1.30%, and CCB emphasized its superior mortgage balance and asset quality relative to peers.
The major banks consistently highlighted successful risk mitigation. CCB’s NPL ratio for real estate declined, supported by stricter prevention measures. ABC adopted a developer-specific framework for targeted disposal of risks. BOC expanded allowances for loan impairment, while ICBC narrowed exposures and improved oversight of mortgage lending. The direct financial cost of this stability was a sharp reduction in interest income, stemming from mandated mortgage rate cuts. All four banks implemented large-scale repricing of outstanding mortgages, with ABC aiding 6.86 million households in loan adjustments. This translated into compressed yields and weaker loan profitability, but underscored the sector’s role as a stabilizer of household balance sheets.
| Product Type | ABC (Total Retail Loans: RMB 8,814,212 million) | CCB (Total Personal Loans: RMB 8,872,595 million) | ICBC (Total Personal Loans: RMB 8,957,720 million) | BOC (Total Personal Loans: RMB 6,825,036 million) |
| Residential Mortgages | 4,984,592 (56.6%) | 6,187,858 (69.74%) | 6,083,180 (67.9%) | 4,660,914 (68.29%) |
| Loans to Private/Personal Business | 2,494,263 (28.3%) | 1,021,693 (11.51%) | 1,677,981 (18.7%) | (Included in Other Personal Loans) |
| Credit Card Balances/Overdrafts | 858,811 (9.7%) | 1,065,883 (12.01%) | 775,364 (8.7%) | 593,403 (8.69%) |
| Personal Consumption Loans | 476,391 (5.4%) | 527,895 (5.95%) | 421,195 (4.7%) | (Included in Other Personal Loans) |
| Other Personal Loans | 155 (0.0%) | 69,266 (0.78%) | N/A | 1,557,405 (22.82%) |
Strategic Developments and Future Outlook
The Chinese central bank also provides opportunities for the banks to diversify their revenue stream. Recently, China’s central bank (PBOC) plans to expand measures in Hong Kong to boost the use of yuan-denominated bonds and accelerate the currency’s internationalization, amid rising US-China tensions. These have many implications for local banks:
- Allows them to raise funds easily in yuan, especially with increased liquidity
- Expands trading and hedging services of banks to manage government bonds
- With increased internationalisation, Chinese banks have a larger presence globally and no longer rely on domestic market
Revenue from these Chinese banks will increasingly be derived from trading and investment banking as they are forced to search for fee generating services. We see this transition as a move to expand domestic banks such that they become increasingly competitive against global banks like JPM, Goldman Sachs. This is also aligned with China’s policy direction of creating globally competitive banks on its home soil.
Beyond this, the banks continue to refine their loan screening process and dedicate resources to new growth areas. The banks’ strategies converge around policy alignment and market stabilization. Central to this are the government’s coordinated financing mechanisms, particularly the urban real estate “whitelist” projects. ABC approved over 1,000 such projects, extending more than RMB 400 billion in financing, while ICBC’s exposure exceeded RMB 130 billion.
Simultaneously, the banks have mobilized resources for the “three major projects”: subsidized housing, urban village redevelopment, and dual-use infrastructure. BOC advanced rental housing development financing, while CCB broke ground by originating the first residential mortgage for allocated-sale affordable housing nationwide.
The future strategies outlined by these banks reflect a strong commitment to fostering a “new development model” for real estate. They plan to further credit allocation to whitelist projects and urbanization reforms. These banks will continue to play a supporting role for the economy in the long term as China’s economy continues to restructure, and we see the PBOC as a fundamental support for them. Due to their importance in China’s economic growth, their share price has strong flooring effect especially with the China National Team having a huge stake in their shares. The current drawdown seems very much to be driven by profit taking and investors being concerned with the growth potential of Chinese banks. The fundamental thesis of supporting China’s economic transition and growth have not changed and we see this thesis to continue to play out for the foreseeable future.
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Thank you for the article. Interesting the banks stocks all have recovered trending upwards.