Analysis of China's banking sector begins with the balance sheet

Overview

This report is J.P. Morgan's foundational research material on China's banking sector, titled "Bank of China 101: Banking Begins with the Balance Sheet." The report starts with the structure of bank balance sheets, then extends to income statements, growth, asset quality, and DuPont metrics, helping investors understand the core drivers of bank profitability, risk, and return on capital.

Core views

The core view of the report is that bank stock research cannot look only at the income statement; it must begin with the balance sheet to understand asset-side yields, liability-side costs, loan and deposit structure, provisions, risk-weighted assets, and equity capital. For China's banking sector, declines in net interest margin, revenue return on assets, cost-to-income ratio, credit cost, and changes in ROA/RORWA are important indicators for assessing industry earnings quality and valuation foundations.

Analysis framework

The report adopts a basic financial decomposition approach: it first presents a sample balance sheet, then explains bank income statement items, and subsequently uses the DuPont framework to connect revenue-generating ability, cost efficiency, credit cost, return on assets, and return on capital, while making cross-market and time-series comparisons using 2017-2025 banking metrics from China and major Asia-Pacific markets.

Methodology notes

• Financial AnalysisBalance Sheet Analysis

  Bank Balance Sheet

  Bank analysis first identifies assets such as cash, central bank deposits, interbank assets, loans, investments, and other assets, as well as liabilities such as interbank liabilities, customer deposits, subordinated debt, and equity.

• Financial AnalysisIncome Statement Analysis

  Bank Earnings Drivers

  Income statement analysis focuses on net interest income, non-interest income, operating expenses, provisions, taxes, and profit attributable to the parent, and links them to average assets or risk-weighted assets.

• Operating MetricsDuPont Summary

  Bank DuPont Decomposition

  Bank profitability is broken down through NIM, non-interest income share, revenue/average assets, cost-to-income ratio, PPOP/average assets, credit cost, ROA, RORWA, and ROE.

• Risk AnalysisAsset Quality Metrics

  Non-performing Loans and Credit Cost

  The report uses indicators such as NPL, provisions, and credit cost to measure asset quality pressure and its erosion of bank profits.

Asset mapping & comparison

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

• China bank stocks

  Core research target

  Strengths

  They have a large deposit base, relatively high balance sheet transparency, and can be compared across periods and markets through the DuPont framework.

  Weaknesses

  Declining net interest margin, lower ROA, and credit cost remain key pressures on earnings quality.

  Comparison

  The report compares China's banking sector metrics with markets including Hong Kong, South Korea, Taiwan, India, Indonesia, Malaysia, the Philippines, Thailand, Singapore, and Australia.

  Risks

  The macro credit cycle, deterioration in loan quality, falling interest rates, regulatory capital requirements, and rigid expenses may suppress returns.

Key data

• Report Date2026-07-27From the file name and document metadata.
• China Banking Sector 2025 NIM1.47%The DuPont Summary table shows that China's NIM declined from 2.06% in 2017 to 1.47% in 2025.
• China Banking Sector 2025 Non-interest Income/Revenue29%The Non-NII/Rev table shows 29% for China in 2025.
• China Banking Sector 2025 Revenue/Average Assets2.9%The Revenue/Average Assets table shows 2.9% for China in 2025.
• China Banking Sector 2025 Cost-to-Income Ratio36%The CIR table shows 36% for China in 2025.
• China Banking Sector 2025 PPOP/Average Assets1.6%The PPOP/average assets table shows 1.6% for China in 2025.
• China Banking Sector 2025 Credit Cost0.8%The Credit cost table shows 0.8% for China in 2025.
• China Banking Sector 2025 ROA0.65%The ROA table shows 0.65% for China in 2025.
• China Banking Sector 2025 RORWA1.11%The RORWA table shows 1.11% for China in 2025.

Impact & implications

This report is more of an industry research framework than a trading recommendation. Its significance for investors lies in establishing the basic coordinates for bank stock analysis: when net interest margin, credit cost, return on assets, and return on risk-weighted assets all come under pressure simultaneously, bank valuation and earnings expectations require greater caution; if deposit costs, asset quality, or non-interest income improve, they may become points to watch for subsequent re-rating.

Risks

• Continued narrowing of net interest margin may depress net interest income and returns on assets.
• Rising credit cost or non-performing loans may erode pre-provision profit.
• An increasing cost-to-income ratio may reflect insufficient revenue growth or rigid expenses.
• If risk-weighted assets expand faster than profit growth, RORWA and ROE may come under pressure.
• The report discloses that J.P. Morgan may have business relationships with covered companies, and investors should be aware of potential conflicts of interest.

What to watch

• Whether China's banking sector NIM stabilizes.
• Whether the share of non-interest income can rise and improve the revenue mix.
• Whether changes in credit cost and NPL indicate an inflection point in asset quality.
• Whether PPOP/average assets, ROA, and RORWA continue to decline.
• The profitability gap between China's banking sector and Asia-Pacific markets in peer comparisons.