In the first quarter of this year, the non-performing loan ratio of China’s banking industry exceeded the net interest margin, leading to a phenomenon of “inversion.” Industry insiders point out that this signifies that the banks’ net interest margins may struggle to cover three major costs, marking a significant turning point for the industry.
It is noteworthy that in the first quarter, the non-performing loan ratio of agricultural and commercial banks soared to 2.86%, while the net interest margin was only 1.58%. In contrast, Shanxi Yuci Agricultural and Commercial Bank recorded a non-performing loan ratio of 34% in 2024, with a net interest margin of -0.53% and a net interest income loss of -96 million yuan, facing two consecutive years of losses.
According to the “2025 Commercial Bank Key Regulatory Indicators Situation Table” released by the China Banking and Insurance Regulatory Commission recently, the average non-performing loan ratio of the banking industry increased from 1.50% in the fourth quarter of 2024 to 1.51%. Concurrently, the net interest margin decreased from 1.52% in the fourth quarter of 2024 to 1.43%. The levels of non-performing loans and net interest margins are inverted.
Typically, a bank’s net interest margin needs to cover three major costs: credit costs, operational costs, and capital costs. Credit costs encompass bad debt losses, opportunity costs, and management costs, while capital costs include interest paid by the bank.
On June 25, Wang Liang, the President of China Merchants Bank, publicly stated at the 2024 Annual General Meeting that the first quarter of this year marked a significant turning point. The phenomenon of non-performing loan ratio and net interest margin inversion suggests that the banks’ net interest margin may struggle to cover the three major costs, posing significant challenges to the sustainable development of banks.
According to the “Implementation Measures for Qualitative Prudential Assessment (Revised in 2023)” issued by the market interest rate pricing self-discipline organization established under the guidance of the People’s Bank of China, a net interest margin above 1.8% is considered a “reasonable range” for commercial banks. However, the net interest margin in the first quarter of 2025 has fallen far below 1.8%. In the first quarter of 2023, the net interest margin of China’s banking industry was 1.74%, falling below the “warning line” of 1.8% for the first time.
Analyses from “New Yellow River,” under the “Jinan Daily,” suggest that the battle to defend the interest margin in the banking industry remains intense. Many industry experts generally attribute the ongoing narrowing of the interest margin in banks to factors such as the downward adjustment of the Loan Prime Rate (LPR) in the Renminbi loan market, adjustments to mortgage rates, and the transformation of deposit terms.
On May 20, the People’s Bank of China reduced the Loan Prime Rate, with both the 1-year and 5-year LPRs dropping by 10 basis points (bps). On the same day, the six major state-owned banks initiated a new round of deposit rate cuts, collectively pushing the 1-year fixed deposit rate below 1%, leading to a rapid cascade of “deposit rate cuts” from major banks to small and medium-sized banks.
It should be noted that the inversion of non-performing loan ratios and net interest margins does not necessarily imply that banks are operating at a loss.
Firstly, non-performing loans refer to the last three levels of the five-grade credit classification system – “substandard, doubtful, loss,” corresponding to provisioning ratios of 20%, 50%, 100%, respectively, indicating that non-performing loans do not equate to total losses for the banks.
Furthermore, the non-performing loan ratio is a long-term cumulative indicator, indicating poor asset quality of the bank over the medium term. In contrast, the net interest margin is a short-term data, typically corresponding to a quarter or a year.
Additionally, banks generate non-interest income, particularly fee income that is obtained without bearing risks.
The first-quarter banking industry regulatory indicators released by the China Banking and Insurance Regulatory Commission also indicate that the non-performing loan ratio of rural commercial banks is as high as 2.86%, with a net interest margin of 1.58%; that of city commercial banks stands at 1.79% for non-performing loans and 1.37% for net interest margin, both showing the “inversion” phenomenon.
Large commercial banks have a non-performing loan ratio of 1.22% and a net interest margin of 1.33%; joint-stock banks have a non-performing loan ratio of 1.23% and a net interest margin of 1.56%. Private banks have a non-performing loan ratio of 1.76% and a net interest margin of 3.95%.
On June 20, Interface News reported that China Chengxin Credit International Rating Company (“China Chengxin International”) downgraded Shanxi Yuci Agricultural and Commercial Bank’s credit rating from BB to BB-.
The report indicated that in 2024, the bank’s non-performing loans balance surged by 10.97 billion yuan to 37.56 billion yuan, with the non-performing loan ratio increasing by 11.51 percentage points to 34.43%.
In 2024, Yuci Agricultural and Commercial Bank recorded a net interest margin of -0.53% and a net interest income loss of -96 million yuan. The bank has suffered losses for two consecutive years, with a net loss of 206 million yuan in 2024, a year-on-year increased loss of 108 million yuan.
With the narrowing net interest margin, relying solely on the interest spread from loans and deposits to sustain profit growth is becoming unrealistic. Recently, many small and medium-sized banks, as well as state-owned banks, have sent notifications regarding increases in fees for credit services, bank card annual fees, ATM withdrawals, and other transaction fees.
Suzhou Bank recently announced a service fee notice stating that starting from September 10th this year, the annual fee for gold cards will be waived, while the annual fee for platinum cards will be 588 yuan per card per year.
Lujiang Agricultural and Commercial Bank also announced that starting from September 1st this year, the fee for out-of-city ATM withdrawals using debit cards will be 3.3 yuan per transaction.
From June 10th this year, China Bank has implemented a new service price list, involving adjustments to various credit card service fees, including the removal of the previous “Great Wall Global Travel Series products counter, self-service channel local withdrawals exemption” service.