Chinese commercial banks gain margin relief, but subdued lending dims outlook

Chinese commercial banks experienced a slight improvement in net interest margin (NIM) during the second quarter of 2026, marking the first quarterly increase since 2022. However, loan demand remained weak, with average NIM rising by just 0.01 percentage point to 1.41 percent. State-owned lenders, city, rural, and private banks all saw increases, while joint-stock and foreign banks struggled further.

The margin recovery faces challenges from weaker borrowing, with new yuan loans dropping by 340 billion yuan in July, much more than the 50 billion yuan decline from the previous year. Total social financing rose by 1.4 trillion yuan in July, driven by increased government and corporate bond issuance. Analysts warn that weak loan demand could pressure banks' balance sheets, asset yields, and NIM in the second half.

The People's Bank of China emphasized the importance of protecting margins, limiting future rate cuts, and diversifying loan benchmarks to maintain lower borrowing costs without compromising bank capital.