Despite predictions from many institutions last year that the net interest margin (NIM) of commercial banks would stabilize in the first quarter of this year, it has turned downward again after remaining flat for three consecutive quarters in 2025.
Recently, the National Financial Regulatory Administration released key regulatory data for the banking and insurance sectors in the first quarter of 2026. The NIM of commercial banks, which had held steady at 1.42% for three quarters in 2025, fell to 1.40%, a decrease of 0.02 percentage points quarter-on-quarter. This marks a new historical low for the commercial banking sector's NIM in Q1 2026.
However, the situation varies slightly among different types of banks. The NIM for large commercial banks was 1.29% in Q1 2026, compared to 1.30% in Q4 2025. Joint-stock commercial banks saw their NIM drop to 1.54% in Q1 2026 from 1.56% in the previous quarter. In contrast, city commercial banks experienced a slight recovery, with NIM rising to 1.38% in Q1 2026 from 1.37% in Q4 2025. Rural commercial banks' NIM decreased to 1.58% in Q1 2026 from 1.60% in the prior quarter.
Why did the NIM of commercial banks fail to stabilize in the first quarter of this year?
According to the central bank's Q1 Monetary Policy Implementation Report, the balance of RMB loans stood at 280.5 trillion yuan, a year-on-year increase of 5.7%, with an increase of 8.6 trillion yuan from the beginning of the year. After adjusting for the impact of local government debt swaps, the growth rate was approximately 6.2%.
Meanwhile, deposits grew more rapidly. By the end of March, the balance of RMB deposits at financial institutions reached 342.4 trillion yuan, up 8.6% year-on-year, with an increase of 13.7 trillion yuan since the start of the year.
Deposits increased by 5.1 trillion yuan more than loans, equivalent to two-thirds of the loan increase. With the growth in income-generating loans significantly lagging behind the increase in liability-based deposits, a decline in NIM was inevitable.
The reasons for the slower loan growth, as explained by the central bank, include profound changes in the domestic financial market's financing structure, with the proportion of loans decreasing and the share of bonds rising notably. Additionally, insufficient effective financing demand, coupled with factors such as local government debt swaps, reforms and risk mitigation for small and medium-sized banks, and economic restructuring and upgrading, have all impacted credit growth.
The interest rates on new loans issued by commercial banks have also declined. According to central bank data, the one-year and over-five-year Loan Prime Rates (LPR) in March were 3.0% and 3.5%, respectively, both down 0.1 percentage points year-on-year. The weighted average interest rate for newly issued loans was approximately 3.2%, a decrease of about 0.2 percentage points from the previous year. In March, the weighted average interest rate for demand deposits was 0.08%, while the weighted average rate for new time deposits was 1.31%.
In recent years, the decline in commercial banks' NIM has narrowed, primarily due to successive significant reductions in deposit rates by commercial banks. According to central bank data, deposit rates have continued to fall since 2024, with the one-year time deposit listed rate cumulatively decreasing by 0.5 percentage points. This round of deposit rate cuts was led by major state-owned banks, followed by joint-stock banks, with local small and medium-sized banks joining in since last year. These consecutive cuts have created room for NIM adjustment. Simultaneously, some regulatory measures by the central bank have also reduced the liability costs for commercial banks. Examples include prohibiting irregular manual interest supplements, implementing a reporting mechanism for deposit bidding rates, and optimizing self-regulatory management of non-bank interbank deposit rates. These initiatives have strengthened the effectiveness of deposit rate adjustments, stabilized banks' liability costs, and effectively lowered the overall cost of liabilities for commercial banks.
Currently, the room for regulatory action to further reduce banks' liability costs appears extremely limited. Although some securities analysts estimate there is still some room for deposit rate reductions, the space is narrow. As deposit rates have fallen to low levels, the shift of deposits away from traditional banking has accelerated, with household deposits increasingly moving to non-bank deposits.
In the first quarter of this year, deposits at non-bank financial institutions increased by 2.03 trillion yuan. In April alone, such deposits rose by 4.5 trillion yuan. In contrast, during the first quarter of last year, deposits at non-bank institutions increased by only 309 billion yuan, with a rise of 1.88 trillion yuan in April.
Although these non-bank deposits ultimately remain within the banking system, the nature of the deposits has changed. Non-bank institutional deposits are generally market-priced, lack deposit insurance, often carry higher interest rates, and have less stable terms. Therefore, since last year, the central bank has introduced multiple regulatory policies to standardize interest rates on interbank deposits and certificates of deposit.
This year, with rising prices, the central bank has refrained from cutting interest rates. The increase in prices is largely driven by external factors, such as imported inflation, rising energy prices due to the Iran conflict, and certain government policies aimed at curbing internal competition. These factors continue to influence prices, making an interest rate cut this year unlikely.
From the above analysis, it is evident that for the NIM of commercial banks to stabilize, rebound, and reach an inflection point, a comprehensive economic recovery and rising demand are necessary. Only when asset returns increase, loan demand grows, and the volume of loans expands will commercial banks regain pricing power for their loans.