by YANG Zhijin

China's banks are showing signs of emerging from a years-long margin squeeze as falling deposit costs and a rebound in wealth management income help revive core earnings growth.

For the first time in years, core lending and fee income — rather than bond-trading gains — became the main driver of earnings growth for listed Chinese lenders.

The country's 42 A-share listed banks reported combined operating income of 1.56 trillion yuan (about US$229 billion) in the first quarter, up 7.6% year on year, while combined net profit rose 3% to 580 billion yuan, according to data provider iFinD and calculations by Jiemian News. It marked the industry’s strongest first-quarter performance since 2022.

For much of the past three years, shrinking net interest margins eroded banks' core income, pushing lenders to rely on selling high-yield bonds and reducing provisions to support earnings. This year, that pattern began to reverse.

Both net interest income and fee income returned to growth, easing pressure on core operations. Banks also relied less on bond-trading gains and increased provisions to rebuild risk buffers, leaving profit growth trailing revenue expansion.

A margin turning point

Net interest income, which accounts for roughly 70% of Chinese banks’ revenue, rose 7.2% year on year to 1.1 trillion yuan in the first quarter, the fastest growth since 2022.

The rebound reflected not only stronger lending but also signs that margins were stabilizing.

Among 26 listed banks that disclosed quarterly margin data, six reported stable or improving net interest margins. Bank of Communications posted a margin of 1.23%, unchanged from a year earlier, while Bank of Guiyang's margin rose 12 basis points to 1.66%.

Analysts said the improvement came mainly from lower funding costs rather than higher asset yields.

Brokerage estimates suggest around 50 trillion yuan of high-yield time deposits matured this year, most of them in the first quarter. After repricing, banks' funding costs fell sharply — a key factor behind the margin recovery.

Three-year and five-year deposit rates at major state banks currently stand at 1.25% and 1.3%, down roughly 150 and 145 basis points respectively from the end of 2022.

"Large volumes of high-cost deposits are being repriced, significantly improving funding costs and helping margins stabilize," one asset-liability management executive at a joint-stock bank told Jiemian News. But the executive warned that weak loan demand continued to pressure asset yields.

A research note by China International Capital Corp (CICC) estimated listed banks' aggregate net interest margin at 1.30% in the first quarter, down 1 basis point from 2025 but up 1 basis point from the previous quarter.

CICC banking analyst and director LIN Yingqi said the stabilization reflected concentrated repricing of long-term deposits and limited impact from loan repricing, as China's benchmark loan prime rate was cut only 10 basis points in 2025.

Still, Lin warned that weak loan demand and pressure on asset yields could lead to renewed margin pressure later this year.

Wealth-management rebound

Fee and commission income, which accounts for about 20% of listed banks' revenue, had been under pressure from weak capital markets and regulatory fee cuts in recent years.

But after Beijing introduced broad market support measures in late 2024, China's stock market rebounded, helping banks recover wealth management fee income.

The 42 listed banks reported combined fee and commission income of 240 billion yuan in the first quarter, up 5.8% year on year.

China Merchants Bank said income from fund distribution jumped 55.11%, reflecting stronger investor activity.

"Stronger equity markets are creating opportunities again," the joint-stock bank executive said.

At Bank of Communications' earnings briefing, executive vice president ZHOU Wanfu said wealth management, custody and investment banking businesses were benefiting from recovering capital markets and the expansion of market-based financing.

Trading less, lending more

In recent years, many listed banks relied on selling high-yield bonds and cutting provisions to sustain profit growth.

As bond yields declined, prices of previously purchased high-yield bonds rose, allowing banks to book investment gains at the expense of future interest income.

This year, that trend reversed.

The 42 listed banks reported combined investment income of 111.9 billion yuan in the first quarter, down 33% year on year, while combined credit impairment losses rose 22% to 423.3 billion yuan.

Lin of CICC said improving revenue conditions allowed banks to rebuild provisions, especially as risks tied to property and retail exposures remain unresolved.

"The trend of boosting profits through lower provisioning since 2021 may be coming to an end," he said.

The improvement in core income could help ease concerns over the health of China's banking system after years of pressure from property risks, falling loan yields and weak credit demand.