The Earnings Resilience and Structural Challenges of China's Megabanks in a Low-Growth, Low-Rate Environment

In a prolonged low-growth, low-interest-rate environment, China's megabanks—Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), and Agricultural Bank of China (ABC)—are grappling with margin compression risks that threaten their profitability and long-term sustainability. As of H1 2025, these institutions have seen their net interest margins (NIMs) contract sharply, driven by central bank rate cuts, deflationary pressures, and structural imbalances in the real economy. For instance, ABC's NIM fell to 1.32% in the first half of 2025, a 13-basis-point decline year-on-year, while ICBC's NIM dropped to 1.30% under similar pressuresChinese megabanks' margin squeeze may extend after the firsthalf decline^[1]. This trend underscores a broader systemic challenge: how to maintain earnings resilience when traditional revenue streams are eroded by macroeconomic headwinds.

Margin Compression: A Systemic Headwind

The root of the margin squeeze lies in the interplay of monetary policy and weak domestic demand. According to a report by S&P Global Market Intelligence, the batch adjustments of outstanding mortgage rates and falling loan prime rates (LPR) have accelerated NIM declines across the sectorChinese megabanks' margin squeeze may extend after the firsthalf decline^[1]. For example, CCB's NIM stood at 1.40% in H1 2025, down from 1.53% in the same period in 2024, while BOC's NIM contracted to 1.26%Chinese megabanks' margin squeeze may extend after the firsthalf decline^[1]. These figures reflect a sector-wide struggle to balance support for the real economy—such as cheap credit for small businesses and housing markets—with the need to preserve profitability.

Structural challenges compound the issue. A Bruegel analysis highlights that China's banking system is vulnerable to external shocks, including U.S. trade policies and global deflationary trends, while domestic imbalances like overcapacity in manufacturing and reliance on exports limit the effectiveness of fiscal stimulusTen challenges facing China's economy^[2]. Meanwhile, the housing sector and local government debt remain “significant but not yet systemic” risks, according to the Institute of International Finance (IIF)China^[3]. These factors create a fragile backdrop for megabanks, which must navigate both internal and external pressures to maintain stability.

Strategic Adaptations: Diversification and Cost Discipline

To mitigate margin compression, China's megabanks are increasingly prioritizing non-interest income and cost management. CCB, for instance, has implemented centralized reforms to reduce the cost of interest-bearing liabilities by 10 basis points in 2024 and expanded into investment and insurance services to diversify revenue streamsCCB delivers steady growth and optimisation, with costs and risks under control^[4]. Similarly, ICBC has emphasized a “reasonable margin” strategy, leveraging digital transformation to optimize asset-liability management and reduce operational costsChinese megabanks' margin squeeze may extend after the firsthalf decline^[1]. These efforts align with broader industry trends: a San Francisco Fed working paper notes that non-interest income, such as capital gains on securities, is becoming a critical buffer in low-deposit banking modelsWorking Papers - San Francisco Fed^[5].

However, the effectiveness of these strategies remains uneven. While ABC managed a 2.7% year-on-year net income growth in H1 2025—partly due to a 7.5% loan expansion—its NIM still languished at 1.32%Chinese megabanks' margin squeeze may extend after the firsthalf decline^[1]. This suggests that even with proactive measures, structural constraints like weak loan demand and regulatory pressures may limit the upside.

The Path Forward: Balancing Resilience and Innovation

The coming months will test the megabanks' ability to adapt. A Bruegel report warns that China's reflationary policies, aimed at countering deflation, may not fully offset the drag from margin compression unless paired with structural reformsTen challenges facing China's economy^[2]. For investors, the key differentiators will be banks that successfully pivot to high-yield assets, accelerate digital transformation, and diversify into fee-based services.

Conclusion

China's megabanks are at a crossroads. While margin compression is a near-term inevitability, strategic initiatives like cost discipline, digital innovation, and non-interest income diversification offer pathways to resilience. However, the sector's long-term health will depend on broader economic reforms and the ability to navigate geopolitical and domestic structural risks. For investors, the focus should remain on banks that demonstrate agility in adapting to a low-margin, high-uncertainty environment.