China Banks' 2Q Earnings Improve, While Divergence Among Joint-Stock Banks Remains a Key Variable
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China Banks' 2Q Earnings Improve, While Divergence Among Joint-Stock Banks Remains a Key Variable
In 2Q26, the banking sector's NIM rebounded quarter over quarter, net interest income growth accelerated, and net profit rose 3% year over year; however, mid-sized joint-stock banks faced profit pressure, while rural banks experienced relatively greater asset-quality pressure.
- Sector NIM increased 2bp year over year and 3bp quarter over quarter to 1.41%; only joint-stock banks recorded a quarter-over-quarter decline in NIM.
- Net interest income grew 9.5% year over year, driving a 4.7% year-over-year increase in operating revenue; pre-provision profit increased 6.0% year over year.
- Sector net profit increased 3.0% year over year, with large state-owned banks' profit growth recovering to 4.6%; mid-sized joint-stock banks' net profit declined 7.8% year over year.
- The NPL ratio rose marginally by 1bp quarter over quarter, while overall asset quality remained manageable; sector provisions grew 11.9% year over year, maintaining high provision coverage.
Report interpretation
Overview
Based on NFRA-disclosed 2Q26 banking-sector data, Morgan Stanley notes that operating trends in China's banking sector were generally stable and improving. Stabilizing and rebounding NIMs, accelerated net interest income growth, and cost control collectively supported improved profitability, though performance diverged across bank types, with joint-stock banks facing particularly notable earnings pressure.
Core views
Core earnings momentum came from continued declines in funding costs and more rational loan growth, which supported quarter-over-quarter NIM recovery. Net interest income grew strongly year over year, but non-interest income declined year over year due to weaker investment income. Profit growth recovered at large state-owned banks, city commercial banks, and rural commercial banks, while net profit at mid-sized joint-stock banks declined, reflecting operating divergence among mid-sized banks. Overall asset quality remained manageable, although rural commercial banks recorded a relatively large increase in NPL ratios.
Analysis framework
The report compares NIMs, NPL ratios, and profit growth by bank type, and uses year-over-year and quarter-over-quarter metrics to break down net interest income, non-interest income, pre-provision profit, and changes in provisions, assessing sector earnings and asset-quality trends.
Methodology notes
Integrated analysis of NIM, net interest income, costs, provisions, and net profit
Assesses the extent of recovery in banks' core earnings through quarter-over-quarter and year-over-year changes, while identifying the impact of revenue mix and cost control on profits.
NPL ratios and provision coverage
Evaluates credit-risk pressure and risk-buffer capacity across bank types by combining changes in NPL ratios and provision growth.
Comparison of large state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks
Compares NIM, profit, and NPL-ratio performance across bank types to identify operating divergence within the sector.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- China Banking SectorSector Coverage Universe
- Strengths
- Quarter-over-quarter NIM recovery, faster net interest income growth, effective cost control, and improving sector profit growth.
- Weaknesses
- Non-interest income declined year over year, and earnings performance is uneven within the sector.
- Comparison
- Profit growth recovered at large state-owned banks, city commercial banks, and rural commercial banks; mid-sized joint-stock banks delivered weaker profit performance.
- Risks
- Weaker investment income, rising credit costs, and widening operating divergence among small and mid-sized banks.
- Large State-Owned Commercial BanksBanking Sector Subsector
- Strengths
- Improved NIM, recovering core-income growth, and 4.6% year-over-year net profit growth.
- Weaknesses
- NPL ratio increased 1bp quarter over quarter.
- Comparison
- Earnings recovery is more evident than at mid-sized joint-stock banks.
- Risks
- Marginal asset-quality deterioration and uncertainty over the sustainability of NIM improvement.
- Joint-Stock Commercial BanksBanking Sector Subsector
- Strengths
- Some banks, including SPDB and Ping An Bank, delivered relatively healthy profit growth; CMB, Industrial Bank, and CITIC Bank may sustain stable growth.
- Weaknesses
- NIM declined marginally quarter over quarter, while mid-sized joint-stock banks' net profit fell 7.8% year over year.
- Comparison
- Overall weaker than large state-owned banks, city commercial banks, and rural commercial banks, with greater internal divergence.
- Risks
- Profit pressure at smaller joint-stock banks, NIM pressure, and further widening of performance divergence.
- Rural Commercial BanksBanking Sector Subsector
- Strengths
- NIM improved quarter over quarter, and profit growth recovered.
- Weaknesses
- NPL ratio increased 2bp quarter over quarter, indicating relatively greater asset-quality pressure.
- Comparison
- Credit-risk pressure is higher than for other bank types.
- Risks
- Rising NPL formation and increased future provisioning requirements.
Key data
- Sector NIM1.41%Up 3bp quarter over quarter and 2bp year over year in 2Q26; NIMs improved quarter over quarter across all bank types except joint-stock banks.
- YoY Growth in Net Interest Income9.5%Continued to recover and was the main support for improving operating revenue.
- YoY Growth in Non-Interest Income-8.7%May have been affected by weaker investment income.
- YoY Growth in Operating Revenue4.7%Sector operating revenue grew in 2Q26.
- YoY Growth in Pre-Provision Profit6.0%Supported by effective cost control.
- YoY Growth in Net Profit3.0%Improved despite higher provisions.
- YoY Growth in Sector Provisions11.9%Banks maintained high NPL provision coverage through growth in revenue and pre-provision profit.
- Change in NPL RatioUp 1bp QoQUp 1bp each at large state-owned banks and city commercial banks, down 1bp at joint-stock banks, and up 2bp at rural commercial banks.
- YoY Growth in Net Profit of Large State-Owned Banks4.6%Recovered in 2Q26, supported by improved growth in core income.
- YoY Growth in Net Profit of Mid-Sized Joint-Stock Banks-7.8%NFRA data indicate a marked deterioration in earnings at mid-sized joint-stock banks.
Impact & implications
At the sector level, NIM recovery and rebounding net interest income support a marginal improvement in bank earnings, and Morgan Stanley maintains its Attractive view on China Financials. Portfolio positioning should account for differences among bank types: profit recovery has been stronger at large state-owned banks, city commercial banks, and rural commercial banks, while individual performance varies widely among joint-stock banks. The report believes SPDB and Ping An Bank delivered healthier profit growth in 2Q, while CMB, Industrial Bank, and CITIC Bank may sustain stable growth; other smaller joint-stock banks may remain under pressure.
Risks
- Improvements in loan growth, funding costs, and NIMs may not be sustainable.
- Continued weakness in investment income could weigh on non-interest income.
- Profit pressure at small and mid-sized joint-stock banks may exceed expectations and widen sector divergence.
- Deteriorating asset quality at rural commercial banks and certain city commercial banks could raise credit costs.
- While higher provisions strengthen risk buffers, they may also constrain profit realization.
What to watch
- Whether NIMs continue to recover in subsequent quarters amid lower deposit costs and changes in loan pricing.
- Whether net interest income growth can continue to offset weak non-interest income.
- Profitability and asset-quality performance at joint-stock banks, particularly small and mid-sized banks.
- Changes in rural commercial banks' NPL ratios and provision coverage trends.
- Earnings delivery at SPDB, Ping An Bank, CMB, Industrial Bank, and CITIC Bank.