Deconstructing the "Alternative Profits" of Small and Medium Banks

When the demand for physical credit diverges and the net interest margin continues to narrow, a group of small and medium-sized regional banks in the depths of transformation have taken an alternative profit path—betting on investment income. In 2025, Longjiang Bank's investment income accounted for over 93% of its operating revenue, Qinghai Bank's share exceeded 75%, and Handan Bank and Mengshang Bank also followed this operational trend, with large amounts of funds flooding into standardized asset management products such as interest rate bonds and credit bonds. Even after deducting the book fluctuations caused by market volatility, the revenue contribution from the investment business of all four banks still exceeded 40%. It cannot be ignored that this shortcut, relying on financial investment to support performance, also comes with many hidden risks, such as shrinking credit scale, declining net interest income, and slowing intermediate business.

Investment Income Supports Half the Picture

As the engine of credit expansion gradually slows, some small and medium-sized banks have shifted their revenue base to investment income.

"Over 50% of assets bet on financial markets, investment income accounts for 90% of operating revenue." In 2025, Longjiang Bank's consolidated income statement showed operating revenue of 5.43B yuan. Breaking down the revenue structure, the annual investment income reached 5.1B yuan, a year-on-year surge of 97.2%, accounting for 93.9% of operating revenue. The tilt in asset allocation also confirms the strategic shift in business. As of the end of 2025, Longjiang Bank's financial investment scale was 209.61B yuan, a year-on-year increase of 17.56%, accounting for over 52% of total assets. By category, debt investments were 156.92B yuan, up 25.96% year-on-year; other debt investments were 11.36B yuan, up over 40% year-on-year, while trading financial assets saw a slight decline.

Qinghai Bank, located in the northwest, has also replicated this path. In 2025, Qinghai Bank achieved operating revenue of 726 million yuan, with investment income of 546 million yuan, accounting for 75.21% of operating revenue. Asset-side matching was also in place. As of the end of 2025, the bank's financial investment scale was 39.29B yuan, a year-on-year increase of 14.56%, with investment categories focusing on bonds and other financial assets. Handan Bank and Mengshang Bank also continued this operational trend. Even though the pace of asset allocation varied slightly, investment income still firmly holds a core position in operating revenue.

Handan Bank's income statement shows that the bank achieved annual operating revenue of 4.86B yuan, of which investment income reached 3.54B yuan, accounting for 72.82% of operating revenue. The financial investment business covers four categories: debt investments, other debt investments, trading financial assets, and other equity instrument investments. The total investment assets amounted to 93.18B yuan, a slight decrease of 4.65% year-on-year, accounting for 36.81% of total assets. Taking the group as an example, Mengshang Bank achieved investment income of 2.41B yuan in 2025, accounting for over 63% of total operating revenue. As of the end of 2025, the bank's total financial investment scale was 85.37B yuan, an increase from the end of the previous year, accounting for 37.52% of total assets. The investment structure mainly consists of standardized financial assets: trading financial assets of 35.17B yuan, debt investments of 17.8B yuan, and other debt investments of 32.39B yuan. The latter two both increased as a proportion of total assets compared to the end of the previous year.

Wu Zewei, a special researcher at Susheng Bank, pointed out that the high proportion of investment income in multiple regional city commercial banks is the result of multiple factors. During the current macroeconomic transition, the demand for physical credit is diverging, regional credit risks for small and medium-sized banks are rising, and the difficulty of obtaining high-quality assets is increasing. At the same time, the continuous narrowing of net interest margins has significantly compressed the profit space of traditional deposit and loan businesses. The financial market business has lower entry barriers and faster returns, making it a primary choice for banks to improve profitability in the short term.

After Excluding Book Losses, the Proportion Still Exceeds 40%

Traditional banks have long anchored their business logic to "deposits and loans as the foundation," relying on deposit-taking and credit lending to earn net interest margins. Looking at horizontal data comparisons of listed banks, state-owned large banks have their asset layout deeply rooted in physical credit, with a solid base of corporate and retail loans, and investment income generally accounts for less than 10% of operating revenue; national joint-stock banks fall within the 10%-20% range; listed city commercial banks and rural commercial banks with localized operations form the tier most reliant on investment business, with most institutions maintaining investment income at 20%-30% of operating revenue.

From a business logic perspective, it is reasonable for small and medium-sized banks to moderately increase their holdings of high-grade bonds. On one hand, government bonds and policy bank financial bonds carry extremely low credit risk, which can hedge against the non-performing pressure of local credit assets and optimize the bank's overall asset risk structure. On the other hand, bond trading has counter-cyclical adjustment properties and can act as a market stabilizer. For this reason, over the past two years, a large number of regional small and medium-sized banks have continuously increased their bond investment positions, relying on fixed-income assets to smooth out the cyclical fluctuations of the credit business, which has become a common industry trend. However, it is worth noting that in a bank's investment business, the three financial statement items—investment income, changes in fair value gains, and exchange gains—are highly correlated.

A banking industry analyst gave an example: during an upward cycle in bond yields, the market prices of banks' existing bond holdings generally decline, leading to a contraction in fair value changes and an expansion of unrealized losses on assets. If a bank, to optimize its asset structure and adjust book profits, sells a large number of its bond holdings at low prices to realize unrealized losses, it will directly drag down current investment income, ultimately resulting in a simultaneous weakening of both the fair value change and investment income indicators. Conversely, during a bull market in bonds and a downward cycle in interest rates, the market prices of bond assets rise, and the spread income from asset price increases grows, which simultaneously boosts the bank's book profits through both types of income.

Therefore, when assessing whether a bank's investment income profit structure is reasonable, it is necessary to consider the hedging effect of fair value changes and exchange gains/losses. Ignoring the linkage between the two can easily lead to a misjudgment of the true profitability of the investment business, resulting in an inflated book return from the investment segment and an overall distortion of operating revenue data.

After excluding the hedging disturbances from fair value changes and exchange gains/losses, Longjiang Bank's investment business profit in 2025 was 4.64B yuan, accounting for 85.3% of operating revenue, making it the bank with the highest reliance on investment business among the four; Mengshang Bank's investment business profit was 2.2B yuan, accounting for 58.28% of operating revenue; Handan Bank and Qinghai Bank's investment business profits accounted for 56.59% and 44.87% of operating revenue, respectively. As can be seen from the data, even after deducting the book fluctuations caused by market volatility, the revenue contribution from the investment business of all four banks still exceeded 40%.

Wu Zewei emphasized that this profit structure relying on investment income has many shortcomings. Investment income is highly tied to financial market conditions, with significant cyclical fluctuations, resulting in poor stability and sustainability of profits. At the same time, it leads to an excessive shift of internal resources toward financial market business, gradually weakening credit and intermediate business capabilities, further exacerbating the reliance on investment business, forming a vicious cycle, and significantly reducing the bank's risk resilience.

The Proportion of Investment Business Needs to Be Clarified

When bond interest rates rise and asset prices are low, banks enter the market in batches to increase holdings, absorbing market selling pressure and stabilizing bond prices; when interest rates fall and bond prices rise, banks opportunistically reduce holdings to realize spread gains, supplement operating profits, and retain more capital for subsequent physical credit投放, forming a virtuous cycle of asset allocation and serving the real economy. However, behind the industry-wide increase in positions, diverging risks have also emerged, with some small and medium-sized banks straying from the original purpose of liquidity management and taking an aggressive heavy-position extreme route.

Previously, some rural commercial banks had imperfect internal control over bond trading and excessive incentives for traders, leading to distorted trading behavior. Some traders used concentrated capital advantages to engage in continuous buying and selling, self-dealing, and frequent quote cancellations to induce trading, affecting bond prices. Some transactions involved interest transfer, and the traders were subjected to self-disciplinary sanctions by the National Association of Financial Market Institutional Investors (NAFMII) and referred to relevant authorities in accordance with relevant laws, regulations, and self-regulatory rules.

In July 2025, at a press conference held by the State Council Information Office, Cao Yuanyuan, a responsible official from the Financial Market Department of the People's Bank of China, responded to media questions about how to view the investment risks faced by many small and medium-sized banks that are still adopting relatively aggressive bond market investment policies.

Cao Yuanyuan stated that based on their own asset allocation considerations, small and medium-sized banks choosing to appropriately increase their bond holdings, increase the allocation of safe assets, and smooth out fluctuations in operating profits is reasonable within the scope permitted by regulation. At the same time, banks' spontaneous buying and selling of bonds can also act as a stabilizer for the market. When bond interest rates are relatively high compared to loan interest rates and prices are relatively low, banks buy bonds, which helps stabilize the market. Conversely, when bond interest rates are low and bond prices are high, banks sell some bonds to realize their own profits and maintain the sustainability of their support for the real economy.

Bai Wenxi, Vice Chairman of the China Enterprise Capital Alliance, pointed out, "For some small and medium-sized banks, a red line for the proportion of investment should be set, with the share of investment business in operating revenue controlled within 40%. The scale of trading financial assets should be gradually reduced, releasing funds to return to the credit main business."

Wu Zewei further pointed out that currently, the regulatory level has not yet clarified a healthy critical threshold for the proportion of investment business revenue for small and medium-sized banks. However, from the perspective of industry practice and risk prevention and control, below 30% is a relatively reasonable range, while exceeding 50% indicates a clear imbalance in the profit structure.

Hidden Concerns Behind the "De-credit" Shift of Funds

For small and medium-sized banks, the massive migration of asset allocation also reflects the real pressure of continuous contraction in credit supply, shrinking traditional deposit and loan interest income, and the difficulty of intermediate business revenue to stand alone.

From the data, Longjiang Bank's net interest income in 2025 was 626 million yuan, a decrease of 807 million yuan year-on-year, a drop of 56.3%, halved compared to 2024. At the same time, the intermediate business failed to provide an effective hedge, with net fee and commission income of 179 million yuan, down over 21% year-on-year, indicating weak growth in conventional revenue-generating businesses such as bank cards and agency wealth management.

Qinghai Bank's net interest income was 539 million yuan, down over 50% year-on-year, with the support of credit interest to operating revenue weakening. On the asset deployment side, the pace of loan contraction continued. As of the end of 2025, total loans were 65.52B yuan, further shrinking from 66.44B yuan at the end of the previous year. More alarmingly, the bank's intermediate business was in a loss-making state, with net fee and commission income of -167 million yuan for the year.

For Handan Bank and Mengshang Bank, the difficulty of increasing revenue from the credit main business is also evident. In 2025, Handan Bank's net interest income was 2.1B yuan, down 0.5% year-on-year, with annual net fee and commission income of only 3.0895 million yuan, a sharp decrease of 52.1% year-on-year; Mengshang Bank achieved net interest income of 1.2B yuan, down 13.8% year-on-year, with net fee and commission income of 320 million yuan, down 12.75% year-on-year.

As Bai Wenxi said, when banks allocate a large amount of funds to standardized assets such as government bonds and financial bonds, rather than local small and medium-sized enterprise loans, their function as "capillaries of the local economy" inevitably weakens. Banks should deeply cultivate characteristic customer groups, focus on local industry chains and small, medium, and micro enterprises, and rebuild credit advantages through supply chain finance, bank-government-guarantee cooperation, and other methods. To restructure intermediate business capabilities, they should rely on local customer bases to develop light-capital businesses such as wealth management, custody, and payroll agency services.

Regarding the reasons for the high proportion of investment income in operating revenue and whether there are clear plans to repair credit supply and balance the revenue structure, a reporter from Beijing Business Today interviewed the above four banks, but as of the time of publication, no response had been received.

Beijing Business Today reporter Song Yitong

(Editor: Qian Xiaorui)

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