This report does not constitute a rating action.
Key Takeaways
- China's monetary stimulus is a net negative for bank margins. We think the latest cuts to key lending rates are part of an easing cycle that will stretch well into 2026.
- Guidance for lower deposit rates --to manage down fierce competition for deposits--could offset some of the pressure on lending margins for the country's banks.
- Risk management is increasingly key to mitigating the strain on banks from rising bad debt, margin compression and investment volatility.
China's stimulus measures announced May 7 picked up where they left off last September. S&P Global Ratings expects further monetary easing over the next two years to offset the shock of higher tariffs. This will pinch bank margins and returns.
Our economists forecast 50 basis points (bps) of cuts in policy rates this year and a further 30 bps in 2026 (see "Global Macro Update: Seismic Shift In U.S. Trade Policy Will Slow World Growth," published on RatingsDirect on May 1, 2025). Yesterday's 10 bps cut was therefore not a surprise.
Regulators yesterday also slashed banks' reserve requirement ratio by 50 bps, boosting system liquidity by some Chinese renminbi 1 trillion.
On a net basis, these and other moves will further strain banks that are already grappling with likely lower economic growth this year, as the tariff tensions hurt jobs and some industries in China and raise default risk.
Banks Will Feel It In Lending Margins
China banks will see further compression of net interest margin (NIM). By our forecasts, average NIMs for the commercial banking sector will drop by about 35 bps over 2025-2027, to 1.16%. In the first quarter of 2025, the banks we rate reported a NIM decline averaging about 10 bps year on year. Our forecasts baked in more compression in NIM over the next two years amid further cuts to policy rates, cushioned somewhat by lower deposit rates.
High provisioning within the Chinese banking sector will help offset some of the strain on overall profitability. We project the return on average assets (ROAA) for the commercial banks will fall 15 bps to 0.48% in 2027, from 0.63% in 2024. That drop would be higher if banks didn't have room to lower provisions from excess provisioning in past cycles. In the first quarter of 2025, the banks we rate reported ROAA decline averaging about 6 bps year on year.
Weaker non-interest income generation could also worsen profitability for some banks. In the first quarter of 2025, non-interest income ranged from being up 19% to down 58% year on year for the banks we rate. A decline in Chinese government bond prices earlier this year led to fair-value losses for some banks' investment portfolios.
Risk management is increasingly key to mitigating the pressure on banks from rising bad debt, NIM compression, and investment volatility.
Part Of The Package For Tariff-Related Strains
Meanwhile, we see potential downside to China banks due to the trade conflict with the U.S. Strains will incrementally come from micro and small enterprises and unsecured consumer credit (see "Forecast Change: China's Bad Loans Likely To See Larger Tariff-Related Downside," May 7, 2025).
Our base case now foresees the nonperforming asset (NPA) ratio ranging 5.6%-6.3% over 2025-2027. This is 15-35 bps higher than our previous estimates outlined in a report published on April 3. The NPA is our broad-measure of problem loans, inclusive of nonperforming and special-mention loans, as well as our estimates of other delinquencies.
That leaves China's banks grappling on two fronts: Compressed lending margins and downside on NPAs.
Related Research
- Forecast Change: China's Bad Loans Likely To See Larger Tariff-Related Downside, May 8, 2025
- Global Macro Update: Seismic Shift In U.S. Trade Policy Will Slow World Growth, May 1, 2025
| Primary Contact: | Ming Tan, CFA, Singapore 65-6216-1095; ming.tan@spglobal.com |
| Secondary Contact: | Ryan Tsang, CFA, Hong Kong 852-2533-3532; ryan.tsang@spglobal.com |
| Research Assistant: | Yoyo Yin, Hong Kong 852-25328057; yoyo.yin@spglobal.com |
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