Banking-sector profits recovered in 2Q26, with large state-owned banks outperforming joint-stock banks

Overview

Based on 2Q26 data from the PBOC and the National Financial Regulatory Administration, the report reviews profitability, net interest margins, asset quality, capital adequacy, and the policy environment for China’s banking sector. It concludes that overall industry data are positive, but performance disparities between large state-owned banks and joint-stock banks have widened further.

Core views

Industry profit growth shifted from a 4% year-on-year decline in 1Q26 to 3% year-on-year growth in 2Q26. Large state-owned banks outperformed expectations, creating upside risk to earnings forecasts.The rebound in NIM and 5% year-on-year profit growth at large state-owned banks demonstrate relatively stronger liability-cost management and operating resilience.Joint-stock banks’ net profit fell 8% year on year, materially below the approximately 1% growth forecast for the covered universe. Aside from Shanghai Pudong Development Bank and Ping An Bank, the risk of earnings misses has increased for other joint-stock banks.Pricing on new loans remains under pressure, but lower deposit costs partly cushion the decline in asset yields.The PBOC emphasized that financial support should shift from credit volume toward quality and efficiency, while elevating the importance of direct financing; the report considers the probability of near-term rate cuts to be low.

Analysis framework

The analysis compares quarterly industry statistics from the NFRA, the PBOC monetary policy report, and disclosed bank financial performance, assessing profits, NIM, asset quality, capital, and credit allocation across large state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks.

Methodology notes

• Fundamental AnalysisGrouped Comparison of Bank Operating Metrics

  Compare profitability, NIM, asset quality, and capital metrics by bank type

  Identifies operational divergence between large state-owned banks and joint-stock banks through quarterly year-on-year and quarter-on-quarter metrics across different bank groups.

• Policy AnalysisMonetary Policy Transmission Analysis

  Assess changes in policy rates, relending, and the structure of direct financing

  Combines short-end rate reform, structural relending, and overseas monetary-policy conditions to assess the likelihood and transmission effects of further domestic easing.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Construction Bank - A / China Construction Bank - H

  The report’s preferred large state-owned bank

  Strengths

  Benefits from the 5% year-on-year profit growth of large state-owned banks, quarter-on-quarter NIM recovery, and relatively stable asset quality.

  Weaknesses

  Sector-wide returns on assets are declining, while new-loan pricing remains under pressure.

  Comparison

  Shows greater resilience in profitability and NIM than joint-stock banks.

  Risks

  Further declines in asset yields, weakening macro credit demand, and deteriorating sector asset quality.

• Bank of China - A / Bank of China - H

  The report’s preferred large state-owned bank

  Strengths

  Benefits from improving performance among large state-owned banks and strong NIM resilience.

  Weaknesses

  Still faces sector-wide pressure on profitability and loan pricing.

  Comparison

  Expected to deliver better performance than joint-stock banks.

  Risks

  Changes in policy and market rates, slower credit demand, and non-performing loan pressure.

• Joint-Stock Commercial Banks

  Relatively less preferred

  Strengths

  Some banks have disclosed profit growth, including Shanghai Pudong Development Bank and Ping An Bank.

  Weaknesses

  Industry-defined profit fell 8% year on year, NIM declined by 1 basis point quarter on quarter, and some banks face risk of earnings misses.

  Comparison

  Significantly lags large state-owned banks in profit growth and NIM performance.

  Risks

  Earnings downgrades, deteriorating asset quality, lower provision coverage, and funding-cost pressure.

Key data

• Industry Net ProfitRMB603.0 billion; up 3% year on year2Q26; down 4% year on year in 1Q26.
• Large State-Owned Bank Profit GrowthUp 5% year on yearDown 1% year on year in 1Q26.
• Joint-Stock Bank Profit GrowthDown 8% year on yearFlat to weaker versus the prior quarter.
• Industry Net Interest Margin1.43%Up 3 basis points quarter on quarter.
• Large State-Owned Bank Net Interest Margin1.33%Up 3 basis points quarter on quarter.
• Industry Non-Performing Loan Ratio1.52%Up 1 basis point quarter on quarter; the industry special-mention loan ratio rose 4 basis points to 2.21%.
• Industry Capital Adequacy Ratio15.26%Up 26 basis points quarter on quarter.
• RMB Loan Growth5.2%As of June 2026; direct financing accounted for 32.4% of outstanding aggregate financing to the real economy, up 1.3 percentage points year on year.

Impact & implications

Profit recovery and rebounding NIM support the relative allocation value of large state-owned banks, but sector-wide ROA and ROE continue to decline, and pressure from lower loan pricing and asset quality has not been eliminated. For joint-stock banks, weaker profitability, declining NIM, and lower provision coverage make earnings risks more pronounced. On the policy front, structural tools and the development of direct financing may reduce market reliance on aggregate credit expansion and immediate rate cuts.

Risks

• Continued declines in new-loan rates may erode NIM.
• Industry NPL and special-mention loan ratios are rising, with more pronounced pressure on city commercial banks and rural commercial banks.
• Joint-stock bank earnings may fall short of expectations, potentially triggering valuation and earnings-forecast cuts.
• Hawkish stances and rate hikes by major overseas central banks may disrupt global bonds, equities, and emerging markets.
• Differences in reporting definitions exist between regulatory statistics and listed banks’ financial disclosures.

What to watch

• Formal 2Q26 results releases from large state-owned banks and joint-stock banks, and the divergence in their profit growth.
• Whether NIM can sustain its recovery with support from lower deposit costs.
• Subsequent changes in NPL ratios, special-mention loan ratios, and provision coverage ratios.
• Loan pricing, the share of loans priced below the LPR, and credit-demand trends.
• Further PBOC communication on short-end rate reform, structural relending, and the path for rate cuts.
• The share of direct financing in aggregate financing to the real economy and loan-growth rates in policy-priority sectors.