Public banks' credit costs in 2025 drop to 0.84%, hitting a decade low! The reserve "water reservoir" may be bottoming out

Is the AI-driven decline in credit costs a sign that banks are shifting their profit models?

Cailian Press, April 7 (Editor: Li Xiang) As the annual reports of most A-share listed banks are disclosed in 2025, the full picture of profitability and risk-resistance capabilities in the banking industry is gradually coming into view.

According to statistics from a research report released by the Banking Team of China International Capital Corporation (CICC) on April 6, the reserve coverage ratio of listed banks in Q4 2025 fell by 7 percentage points quarter-on-quarter to 230%, and the loan loss reserve to loan ratio fell by 7 basis points quarter-on-quarter to 2.78%. What is worth flagging is that in 2025, the credit cost of listed banks (loan impairment losses accrued in the period ÷ average loan balance) was only 0.84%, the lowest level in nearly a decade. The industry’s room to release reserves to generate additional profit has already been very limited.

Cailian Press notes that, as the most core and most commonly used tool for commercial banks to adjust profits, the accrual and release of loan loss reserves have long been the “cash reservoir” for banks to smooth fluctuations in earnings. However, in Q4 2025, the contribution of reserves to the growth rate of profits turned from positive to negative.

Industry insiders say that the space for the industry to release reserves to supplement profits may already have approached a ceiling. Combined with the emergence of concerns about asset quality, both the operational space and willingness to release reserves are significantly constrained, putting pressure on bank profitability in 2026.

Credit costs fall to historical lows; room to reduce provisioning is limited

“The core vehicle for profit from reserve releases is the sustained decline in credit costs. This indicator has already reached the bottom range of the past decade, so there is limited room for further reduction.” The above CICC research report says.

Data shows that in 2025, the overall credit cost of listed banks was only 0.84%, the lowest since 2016. By institution type, credit costs were as low as 0.48% for state-owned big banks; for joint-stock banks and regional banks they were 1.05% and 0.87%, respectively—across all types of institutions, they are in historical low ranges.

It is understood that, as the “cash reservoir” for smoothing profit fluctuations, the accrual and release of loan loss reserves can adjust current net profit through asset impairment losses accrued against credit assets. The continued decline in credit costs is one of the paths that banks have used in recent years to support profits through reserve releases. However, this trend saw a turning point in 2025.

According to CICC research report data, since 2021, bank reserves have continuously contributed positively to profit growth. But this trend saw a turning point in Q4 2025, and reserves from listed banks have already shifted to dragging on the growth rate of profits.

Figure: In Q4 2025, reserves turned into a drag on the growth rate of profits

Data source: CICC Banking Team; compiled by Cailian Press

“This is a very important signal, because the decline in credit costs is not limitless. Even without considering the needs to offset risks from non-performing assets, credit costs cannot indefinitely approach zero.” A person from a listed city commercial bank told Cailian Press that because banks’ non-performing loans continue to be generated every year, banks need to use the provisions accrued in the current period to write off and dispose of them. Meanwhile, many banks’ non-performing loan ratios are already higher than their credit costs. Continued provisioning only consumes the “old capital” accumulated over many past years, which is not sustainable.

In addition, judging by the core regulatory indicator of reserve coverage ratio, it also further limits the overall room for banks to release reserves.

According to Ma Tingting, Chief of the Banking Department at Guotai Junan Securities, the overall reserve coverage ratio of 29 listed banks that have already disclosed their 2025 annual reports was 232%, down 2 percentage points from the end of Q3 2025, and the pace of decline has accelerated.

Cailian Press notes that although the overall level still remains far above the 150% regulatory red line, differentiation among institutions is becoming increasingly clear. Many small and medium-sized banks’ reserve coverage ratios have approached and even fallen below the level considered acceptable by regulators.

Among state-owned big banks, as of the end of 2025, Agricultural Bank had the highest reserve coverage ratio at 292.55%, the only one among the six major banks still maintaining above 250%. China Construction Bank, Postal Savings Bank, Industrial and Commercial Bank, and Bank of China had reserve coverage ratios of 233.15%, 227.94%, 213.60%, and 200.37%, respectively, all showing a decline compared with the previous year. Among them, Postal Savings Bank’s reserve coverage ratio has seen a one-way downward trend for nearly 5 years. Only Bank of Communications’ reserve coverage ratio has continued to rise; by the end of 2025 it increased by more than 6 percentage points to 208%.

Figure: Changes in reserve coverage ratios of large state-owned banks over the past five years (%)

Data source: Annual reports of various banks for 2025; compiled by Cailian Press

The situation is even more severe for joint-stock banks. Among the joint-stock banks that have disclosed annual reports, Minsheng Bank and Huaxia Bank had reserve coverage ratios of only 142.04% and 143.30%, respectively, both falling below the 150% regulatory red line, and lacking the prerequisite for reserve releases. Industrial Bank and Ping An Bank had reserve coverage ratios of only 228.41% and 220.88%, respectively, and their space for action is also not as large as in previous years.

“Only a few leading institutions such as China Merchants Bank and Agricultural Bank still maintain reserve coverage ratios at high levels of above 290%. If we make static calculations based on the 150% regulatory red line and a 25% corporate income tax rate, Agricultural Bank could theoretically release a reserve amount of about 3200 billion yuan, equivalent to 118% of its net profit for 2025. China Merchants Bank could theoretically release about 1170 billion yuan, equivalent to 79% of its annual net profit. The two institutions do indeed still have sufficient profit-balancing safety margins. But it needs to be made clear that the combined share of total assets of these two institutions among A-share listed banks is only a little over 20%. The other institutions that reach such a high level are mainly regional rural commercial banks with asset sizes below one trillion yuan. The overall picture that the industry’s reserve space has hit its ceiling is quite clear,” said a banking industry analyst to Cailian Press.

Asset quality forward-looking concerns are emerging; potential risks constrain willingness to release reserves

Cailian Press notes that, besides the hard constraint of regulatory red lines, potential pressure on asset quality also makes banks unwilling to continue releasing reserves easily, becoming the key “soft” constraint that restricts reserve operations.

From surface-level data, asset quality in the banking industry remains stable. As of the end of 2025, the non-performing loan ratio of listed banks was 1.24%, down 1 basis point from the end of Q3, and down 2 percentage points for the full year. However, forward-looking indicators have already shown clear warning signals.

According to data from CICC reports, the proportion of loans under watch status among listed banks increased by 4 basis points compared with the end of the first half of the year. The “spread” between this and the non-performing loan ratio has continued to widen. This may indicate that potential asset quality pressures in areas such as retail and real estate are still accumulating.

Cailian Press has compiled the proportions and changes of loans under watch status among listed banks for 2025 as follows:

Figure: Proportion of loans under watch status among listed banks in 2025 and related changes

Source: Choice data; compiled by Cailian Press

“The core role of reserves is risk offsetting, not simply adjusting profits.” A bank professional told Cailian Press, “The rise in loans under watch status means that in the future there may be more loans that move from watch status to non-performing status. Banks must set aside enough provisions to deal with such potential risks. If we release all the provisions now, when non-performing loans are exposed in large scale in the future, there won’t be sufficient risk buffers. That would not only directly erode profits, but also affect the capital adequacy ratio.”

This point may be even more evident among small and medium-sized banks. Analysts point out that for regional small and medium-sized banks, their credit lending is more concentrated in their local region and specific industries. As a result, their asset quality tends to be more volatile, they have higher requirements for the reserve safety cushion, and they have even less motivation to release reserves in exchange for short-term profit growth.

Market participants generally believe that, as the space for releasing reserve-related profits reaches its ceiling, bank industry earnings growth in 2026 will face pressure, shifting from the past “reserve-backed support” to “revenue-driven” growth. Compared with reserve releases as a backstop, banks will be able to achieve long-term, stable growth in earnings through front-end adjustment methods such as multi-period recognition of fee and commission income, and adjustment of the interest spread on the liability side, so as to benefit from an environment in which interest rate spreads gradually stabilize.

(Cailian Press, Li Xiang)