China bank margins to recover as rate cuts pause but NPLs linger

Retail loan NPLs are yet to peak, said UOB Kay Hian.

Chinese banks face a more favourable operating environment, as no more policy rate cuts are expected in 2026, said UOB Kay Hian.

This should ease net interest margin (NIM) pressure on banks, and in turn, translate into a modest growth in earnings, the company said.

Most of China’s banks delivered a solid NIM performance in Q1 2026. Based on data from the People’s Bank of China (PBOC), the weighted average loan rate of ordinary loans eased 1 basis point (bp) quarter-on-quarter (QoQ) to 3.54%, whilst the new mortgage rate held steady at 3.06% in Q1.

This reflected reduced loan pricing competition following the PBOC's measures to curb irrational pricing behaviour, UOBKH said.

“Additionally, the upcoming implementation of self-disciplined interbank deposit rate caps should also provide further relief on banks' funding costs,” wrote UOBKH analysts Kenny Lim Yong Hui and Tham Mun Hon.

Despite the earnings growth in Q1, most banks logged only low single digits, as they rebuilt excess provisions amidst a retail non-performing loan (NPL) ratio that has yet to peak, they added.

“In terms of performance divergence, state-owned enterprise (SOE) banks and selected regional banks were standout outperformers…whilst certain joint stock banks disappointed the market with sluggish results,” the report said.

The Middle East conflict could still weigh on corporate profitability.

“However, the banks have indicated that corporate asset quality remains stable and continue to monitor developments closely,” the report said.