China’s biggest banks have warned that their profit margins will come under even more pressure in the second half of the year as the world’s second-largest economy struggles with deflation, weaker demand, and global uncertainty.

Since the COVID-19 pandemic, Chinese banks have been dealing with shrinking profits. This is largely because the central bank has repeatedly cut interest rates to boost a slowing economy, which makes it harder for lenders to earn money on loans. At the same time, demand for new loans has been weaker than expected.

The country’s top five banks, including Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, and Bank of Communications, all reported falling profit margins in their latest half-year results. Net interest margin, a key measure of how profitable banks are from lending, dropped to a record low of 1.42% by the end of June. This is below the 1.8% level that the industry generally considers the minimum needed for sustainable profitability.

Bank of China President Zhang Hui admitted that the sector faces common pressures but stressed that the bank is confident in its ability to respond while keeping overall performance stable. Similarly, executives from Bank of Communications said margins would remain under strain, though the pace of decline could slow compared with previous years.

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Earnings were mixed across the sector. Agricultural Bank posted a 2.7% increase in net profit, while Bank of Communications saw a 1.61% rise, both beating analyst expectations. On the other hand, net profit fell at Industrial and Commercial Bank of China, China Construction Bank, and Bank of China by around 1%. Notably, China Construction Bank’s drop surprised analysts, who had expected growth.

Despite the margin squeeze, the data showed that bad loans had not increased significantly in the first half of the year. Still, concerns remain about struggling businesses, consumers, exporters facing higher U.S. tariffs, and most importantly, the property market.

China’s Real Estate Sector

China’s real estate sector, once a major driver of growth, has been in a prolonged slump for over four years. Falling prices, weaker sales, lower investment, and stalled construction projects continue to weigh on the broader economy. Bank of China Vice President Wu Jian said the property sector remains the top source of new non-performing loans, signaling that risks are far from over. Agricultural Bank of China’s president Zhiheng echoed the same view, saying the lender would focus closely on managing risks tied to real estate.

To strengthen the financial system, four of the largest state-owned banks launched a $72 billion recapitalisation plan earlier this year. Still, the pressure to support the wider economy remains high, with banks being pushed to offer cheaper loans and easier repayment terms, which in turn eats into profitability.

With the property sector in deep trouble and loan growth slowing to record lows, analysts believe Chinese banks will face a tough balancing act in the months ahead ensuring financial stability while navigating thinner margins and rising risks.

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