The latest semi-annual report once again highlights the fragile situation of China’s small and medium-sized banks. From the continuous narrowing of net interest margins, weakened profitability, deteriorating asset quality, to the soaring non-performing loans in the real estate sector, these regional financial institutions are facing unprecedented pressure and are in distress. Analysts believe that with China’s economic growth slowing down and the real estate crisis intensifying, small and medium-sized banks may become a weak link in the financial system.
Commercial banks rely significantly on net interest margins as one of their most important sources of profits. However, with weak loan demand and difficulty in further lowering deposit rates, the net interest margins of small and medium-sized banks are rapidly being squeezed.
Net interest margin (NIM) usually refers to the ratio of a bank’s net interest income to its total interest-bearing assets, serving as a core indicator of a bank’s profitability.
Data from the China Banking and Insurance Regulatory Commission shows that in the second quarter of 2025, the average net interest margin of commercial banks dropped to 1.42%, with city commercial banks at 1.37% and rural commercial banks at 1.58%. This level is approaching the industry’s widely recognized “profit warning line.”
Specifically, although Changshu Bank leads 42 listed banks with a net interest margin of 2.58%, it also decreased by 13 basis points from last year, while Xiamen Bank ranks at the bottom with only 1.08% among all listed banks.
Several regional banks have net interest margins below the industry average. Five city commercial banks and seven rural commercial banks have lower net interest margins compared to their peers, indicating a widespread decline in net interest margins for most small and medium-sized banks.
In the face of narrowing net interest margins, some small and medium-sized banks have increased their financial investments and emphasis on intermediary businesses to boost revenue. However, this strategy may increase risk exposure amid bond market volatility and credit pressure.
The continued sluggishness in the real estate market has become a major source of asset deterioration for small and medium-sized banks. The latest semi-annual reports reveal a significant increase in non-performing loans in the real estate sector for many regional banks.
For instance, Qingshan Agricultural Bank saw its non-performing loan ratio in the real estate industry surge from 7.17% at the end of last year to 21.32%. The corresponding increase in bad loan balance reached around 1.2 billion yuan, accounting for over 60% of the bank’s total non-performing loans. While the bank attributes this to “individual loan risk exposure,” the sharp deterioration in data has caused market shock.
Other banks are also facing high risk exposure. Data from Wind indicates that as of the end of the first half of the year, Zhengzhou Bank had a real estate non-performing loan ratio of 9.75%, Chongqing Bank at 7.19%, Hangzhou Bank at 6.44%, and Jiangsu Bank at 3.95%. Compared to that, Shanghai Rural Commercial Bank and Ningbo Bank still maintain non-performing loan ratios below 1%, but the overall trend in the industry is clearly deteriorating.
Pressure exists in the personal loan sector as well. Guiyang Bank disclosed that its personal loan non-performing rate increased from 2.86% to 3.19%. The bank’s financial report indicates that the increase in bad debts mainly comes from risk exposure in the real estate industry and related industrial chains.
These figures mirror the downward trend in China’s property market. With frequent defaults by real estate firms and heavy local government debt burdens, the asset quality pressures faced by small and medium-sized banks far exceed those of large state-owned banks.
Risk is not limited to listed banks. A report by Caitong Securities shows that the assets of some non-listed rural commercial banks have significantly shrunk. For example, Ningbo Yinzhou Rural Commercial Bank saw a decrease of 15.45% in assets within half a year, while Shandong Laizhou Rural Commercial Bank recorded a drop of 12.04%.
In terms of asset structure, many small and medium-sized banks have excessive reliance on financial investments. The report mentioned above indicates that banks like Shanxi Shenmu Rural Commercial Bank, Yunnan Hongta Bank, and Shandong Juxian Rural Commercial Bank have financial investments comprising over 45% of their assets, with the highest reaching 52.34%. Over-investment in financial assets signifies a deviation from the banks’ initial purpose of serving the real economy and increases the risk brought by market fluctuations.
Worrisome data also surrounds asset quality. Guangzhou Rural Commercial Bank’s delinquency rate rose from 4.45% to 7.12%, while Zhuzhou Rural Commercial Bank and Datong Rural Commercial Bank saw their non-performing loan rates increase to 4.15% and 4.97%, respectively.
As profitability declines, the pressure for capital supplementation has become evident. The semi-annual report shows that only about a third of small and medium-sized banks have seen noticeable increases in capital adequacy ratios, while the rest continue to face challenges in capital generation.
Sun Binbin, Chief Economist and Fixed Income Analyst at Caitong Securities, mentioned to Yicai that with the background of shrinking net interest margins, banks face greater difficulty in internal growth.
Further investigation by auditing agencies reveals governance risks. A report from the Shandong Provincial Audit Office points out that 11 local rural commercial banks have issues such as inadequate credit support for the real economy and weak governance controls. Some banks are holding real estate properties received in debt settlement worth 1.693 billion yuan, sitting idle due to insufficient market demand.
Analysts note that for some small and medium-sized banks, debt assets are turning into new “zombie assets,” challenging liquidity and adding to their asset burden.
Although the overall trend is weak, regional disparities are significant. City commercial banks along the eastern coast continue to demonstrate stronger profitability. In the first half of 2025, Jiangsu Bank’s net profit exceeded 20 billion yuan, ranking first among all city commercial banks in the country, far surpassing Beijing Bank.
However, this strength does not alter the structural risks within the industry. Profitable banks are concentrated in economically developed regions, while many rural commercial banks in the central and western regions are experiencing asset deterioration and declining profitability, further widening the divide.
Small and medium-sized banks hold a considerable share in China’s financial system but often face challenges of weak capital and inadequate risk management. Should real estate or local debt risks escalate further, these banks could become the trigger points for a crisis.
The Chinese government has repeatedly urged local financial institutions to boost capital and strengthen regulation. However, in an environment of slowing economic growth, a depressed real estate market, and continued narrowing of interest rate spreads, the uncertainty remains as to whether policy support can timely offset the pressure.
Compared to banks in the United States, the profit margins of Chinese small and medium-sized banks are significantly weaker. According to regulatory data, the average net interest margin of commercial banks in the second quarter of 2025 was only 1.42%, with some small and medium-sized banks even dropping below 1%. This level is seen as nearing the industry’s “warning line” for profitability.
In contrast, the net interest margins of U.S. banks generally fall within the range of 2.5% to 3.5%. The FDIC’s “Quarterly Banking Profile – Q4 2024” states that the net interest margin of all FDIC-insured institutions in the U.S. was 3.28% in the fourth quarter of 2024, maintaining relatively high levels even in a high-interest rate environment.
Moreover, the greatest pressure faced by Chinese small and medium-sized banks comes from the stagnation in the real estate market and the implicit debt of local governments. The sharp rise in bad debts from the real estate sector, combined with credit risks from local government financing platforms, directly threaten the asset quality of small and medium-sized banks.
Clearly, Chinese small and medium-sized banks are caught in a double bind of “low interest spreads, high bad debts,” leading to immense survival pressure.
Some small and medium-sized banks overly rely on financial investments, lacking sufficient support for the real economy. This profit model further weakens their stability.