Commercial bank net interest margin "bottoming out and stabilizing"

Ask AI · What are the key factors driving the stabilization of net interest margins?

Reporter Lao Yingying

Currently, listed banks are gradually disclosing their 2025 annual reports. Based on the disclosed data, the overall net interest margin of commercial banks remains in a year-on-year decline, but the rate of decline has significantly narrowed compared to 2024.

From recent month-on-month data released by the China Banking and Insurance Regulatory Commission, the net interest margin of commercial banks has maintained at 1.42% for three consecutive quarters (Q2, Q3, Q4 of 2025), no longer declining unilaterally.

Yen Meizhi, head of financial institution industry research at UBS Asia-Pacific, told the Economic Observer that 2026 will be the bottoming year for the net interest margins of mainland listed commercial banks, and the industry’s net interest income is also expected to generally turn positive year-on-year in 2026.

Narrowing decline

Luan Xiaoqin, general manager of the Financial Institution Rating Department at Standard & Poor’s, also told the Economic Observer that, according to data disclosed by the China Banking and Insurance Regulatory Commission, the average net interest margin of commercial banks stabilized around 1.42% during 2025, indicating a bottoming trend for the industry overall.

In fact, as of now, among the listed banks that have disclosed their 2025 annual reports, a few banks have seen their net interest margins rebound or stay flat. For example, Minsheng Bank’s net interest margin is 1.40%, up 1 basis point (BP) year-on-year; Bohai Bank’s net interest margin is 1.37%, up 6 BPs; and Shanghai Pudong Development Bank’s net interest margin is 1.42%, unchanged from the previous year.

However, looking at the overall banking sector, most net interest margins are still declining year-on-year, but the decline has narrowed to varying degrees. For example, among large state-owned banks, ICBC’s net interest margin declined by 14 BPs in 2025, narrowing from a 19 BP decline in 2024; China Construction Bank’s net interest margin declined by 17 BPs in 2025, narrowing from a 19 BP decline in 2024.

Among joint-stock commercial banks, China Merchants Bank’s net interest margin declined by 11 BPs in 2025, narrowing from a 17 BP decline in 2024; Ping An Bank’s net interest margin declined by 9 BPs, significantly narrowing from a 51 BP decline in 2024; and Zheshang Bank’s net interest margin declined by about 11 BPs, narrowing from a 30 BP decline in 2024.

Although the number of city commercial banks and rural commercial banks disclosing their annual reports is still limited, the data from those that have disclosed their 2025 financials show that the decline in net interest margins is also narrowing significantly or even beginning to rebound. For example, Qingdao Bank’s net interest margin is 1.66%, down 7 BPs year-on-year, narrowing from a 10 BP decline in 2024; Chongqing Rural Commercial Bank’s net interest margin declined by 1 BP year-on-year, also significantly narrowing from a 12 BP decline in 2024; Chongqing Bank’s net interest margin is 1.39%, with a slight rebound of 4 BPs year-on-year, after a 17 BP decline in 2024.

Market participants generally believe that the stabilization of listed banks’ net interest margins is not due to a single factor but results from multiple factors working together, including the decline in liability costs, easing asset pressure, and gradually increasing credit demand in emerging fields.

Among these, the sustained decline in liability costs has provided clear support for the overall stabilization of net interest margins. For example, Guotai Haitong Securities Research Institute mentioned in a related report that the funds from residents’ fixed-term deposits maturing in 2026 are the last batch of long-term funds enjoying “3” interest rate levels. Listed banks have seized this window, replacing high-interest deposits upon maturity with lower-interest demand or fixed deposits, directly lowering overall deposit costs. Additionally, with multiple rounds of deposit rate cuts in recent years, the rates for large certificates of deposit have also been continuously lowered. Currently, five-year products are hard to find in the market, and three-year products are generally marked as “sold out” or “quota tight.”

A researcher from a joint-stock commercial bank also told the Economic Observer that, from the perspective of economic demand, China’s economy maintains a medium-high growth rate of about 5%, providing fundamental support. Moreover, the People’s Bank of China has limited room for further rate cuts; in 2025, the Loan Prime Rate (LPR) was only lowered once by 10 BPs. The pressure on bank asset sides continues to ease. Additionally, the macroeconomy is in a recovery phase; although demand in traditional industries remains weak, credit and financing demand in emerging fields like new energy and chip manufacturing is strong, with profits improving. This structural momentum has driven the expansion of overall financial service demand, creating favorable conditions for the gradual stabilization of banks’ net interest margins.

Can it rebound?

At the recent 2025 performance meetings of listed banks, many bank management teams projected that the decline in net interest margins in 2026 would narrow significantly, possibly better than in 2025, with net interest income achieving positive growth.

For example, Yao Mingde, vice president of ICBC, gave a basic judgment: “The net interest margin in 2026 is very likely to show an ‘L-shaped’ trend. If we do not consider further large adjustments to the LPR or deposit rates, I expect our interest net income to turn positive year-on-year this year, marking an inflection point, and the decline in net interest margin will further narrow compared to 2025.” Yao Mingde said that, in the short term, the downward trend of net interest margins has not changed, but the favorable factors promoting improvement are continuously accumulating, and the marginal stabilization trend is expected to continue.

In fact, some banks have already seen their net interest income turn positive in 2025. For example, Bank of Communications’ net interest income is 173.08B yuan, up 1.91% year-on-year; China Merchants Bank’s net interest income is 215.59B yuan, up 2.04%.

In response, Yen Meizhi believes that the net interest income of the banking industry in 2026 is expected to generally turn positive year-on-year. Rising input energy prices, such as oil, help reverse deflation expectations, and CPI is expected to maintain positive growth. The bond market’s pessimistic expectations about excessive rate cuts have also been revised, reducing the need for comprehensive rate cuts, and the pace of rate reductions will slow significantly. For banks, as the stock of high-cost fixed-term deposits matures and re-pricing occurs, deposit costs will continue to decline, effectively offsetting the downward pressure on asset yields.

So, can commercial banks’ net interest margins rebound? Yen Meizhi said that, in the short term, there are still certain difficulties, mainly depending on the specific situation of credit demand recovery, improvements in residents’ income and employment expectations, and the reversal of negative effects from real estate wealth.

She also stated that, from the perspective of interest margin operation logic, banks’ asset sides still face slight downward pressure, mainly due to re-pricing of existing mortgage and corporate loan rates, limited supply of high-quality credit assets, and increased competition among banks. In 2025, the overall yield on bank loans declined by about 30 to 50 BPs, with retail loans experiencing a larger decline. In the first half of 2026, as high-cost fixed-term deposits mature and re-price, deposit costs will fall rapidly, but the interest rates for fixed deposits have already dropped below 1%, with limited room for further decline, and the offset effect will gradually weaken.

Luan Xiaoqin believes that regional small and medium-sized banks may achieve net interest margin recovery earlier. Specifically, in 2025, the net interest margin of large state-owned banks slightly declined from 1.33% in Q1 to 1.30% in Q4; joint-stock commercial banks and city commercial banks remained stable at 1.56% and 1.37%, respectively; while rural commercial banks increased from 1.58% in Q1 to 1.60% in Q4.

Luan Xiaoqin said that for banks with a high proportion of fixed-term, especially medium- and long-term deposits, the re-pricing of maturing deposits helps significantly reduce liability costs, mainly regional city and rural commercial banks. In contrast, large state-owned banks and leading joint-stock banks, which started managing liability structures and costs earlier, already have a high proportion of demand deposits, leaving limited room for further liability cost reduction. Additionally, as market interest rates continue to decline, depositors’ sensitivity to deposit pricing increases, narrowing the extra interest margin that regional banks need to pay to attract deposits, which is also favorable for their liability cost management.

Luan Xiaoqin also believes that the credit quality of large state-owned banks and joint-stock commercial banks is generally strong, with loan pricing relatively low; whereas regional banks mainly engaged in micro, small, and urban investment projects tend to have higher loan pricing, resulting in wider interest margin space. Considering the current international situation, the likelihood of a significant short-term rate cut is low, which also helps stabilize the asset-side yields of small and medium-sized banks.

A researcher from a domestic joint-stock commercial bank also believes that the current uncertainty about domestic inflation prospects is increasing. The key issue is the future pace and magnitude of inflation’s rebound, whether it will be moderate and maintain low inflation or show a more pronounced upward trend, which remains to be seen. Generally, if inflation rises moderately, it will boost economic activity, improve consumption and investment willingness, direct funds into real estate, wealth management, and stock markets, improve corporate profits, increase credit demand, and strengthen banks’ bargaining power, all of which are conducive to further stabilizing and rebounding net interest margins.