Beijing's stepped-up fiscal support helped China's largest state-owned banks post modest profit gains in the first quarter. Industrial & Commercial Bank of China, the country's biggest lender, reported a 3.3% rise in net profit to 86.9 billion yuan, while Agricultural Bank of China and Bank of Communications logged increases of 4.5% and 3.1% respectively. Policymakers boosted first-quarter spending 2.6% to 7.47 trillion yuan and pledged special sovereign bonds to shore up lenders, a mix of measures that, together with more cautious lending, looks to be stabilizing balance sheets after years of margin pressure and weak asset quality.

Earnings beat a weak backdrop

China's big state banks posted positive, if small, profit moves in the January‑to‑March quarter. Industrial & Commercial Bank of China, the largest by assets, said profit rose 3.3% to 86.9 billion yuan in an exchange filing on April 29. Agricultural Bank of China reported a 4.5% increase. Bank of Communications posted a 3.1% rise.

Those gains come after a long period of stagnant bottom lines for the sector. State lenders have been carrying a policy burden. Beijing has required them to lend at cheaper rates and to give debt relief in parts of the economy. That has squeezed revenues for years.

Net interest margins, the main engine of bank profits, were stable at some banks and kept narrowing at others. Non‑performing loan ratios were largely stable across the major lenders, according to the filings and commentary from the banks.

Still, margins remain near record lows for the industry.

Policy support: cash on hand and fiscal stimulus

Policymakers have moved to shore up the financial system. In March, authorities pledged to issue special sovereign bonds to recapitalise the biggest banks.

The aim was to bolster a banking system that underpins a large share of the economy.

At the same time, Beijing has stepped up fiscal spending. The finance ministry said first‑quarter fiscal expenditure rose 2.6% year on year to 7.47 trillion yuan, and fiscal revenue grew 2.4% to 6.16 trillion yuan. The ministry said those outlays accounted for 24.9% of this year’s budgeted spending, a high share compared with recent years.

That surge in public spending comes as central planners pledge record government bond issuance and extra transfers to local governments. This moves are intended to support growth amid global uncertainty linked to the Middle East conflict and other risks, the finance ministry said.

Mastheads

Pressure from the property slump and land sales fall

Local government finances remain under strain. The ministry said revenue from land sales by local governments dried up, falling 24.4% in the first three months and 25.2% in the first two months of the year. Local authorities have long relied on land‑use rights sales as a major revenue source. The drop reflects the ongoing weakness in the property market that began in mid‑2021.

That weakness matters to banks because developers are big borrowers. Slower land sales limit local fiscal space too. Regions with weaker finances may need more transfers from central government or find it harder to support local credit growth.

Market and rating‑agency views on the outlook

Some analysts see signs the profit squeeze could ease later in the year. Morgan Stanley analysts led by Richard Xu wrote in late March that revenue may recover for the remainder of 2026. The note said deposit repricing and a move away from cut‑throat loan pricing should help net interest margins this year.

Rating agencies are watching balance‑sheet repair closely. Vivian Xue, director for financial institutions at Fitch Ratings, said banks’ balance sheets will be underpinned by a more prudent approach to loan growth and by active disposal of problem assets. Fitch expects those steps to reduce pressure on asset quality over time.

Even so, the immediate environment is mixed. Inflation expectations have risen after the oil price shock tied to the Iran war. That, together with higher global risks, has made some economists less sure the central bank will loosen policy this year. The result is a narrower set of options for both monetary and fiscal managers when dealing with bank stress.

On the ground, the adjustments show up in lending and deposit pricing. Banks have offered cheaper credit to support the cooling domestic economy.

At the same time, analysts say deposit rates are being repriced higher in parts of the market. That shift reduces banks’ funding cost disadvantage and can help margins recover.

Borrowers, especially developers, still face tight conditions. Lenders are growing more selective. The shift toward prudent loan growth means some sectors will see less access to cheap bank funding. That will change how corporate balance sheets are managed and how developers finance projects.

Two forces are now shaping bank balance‑sheet repair. One is market‑level adjustment. Banks are trimming risky exposures and trying to sell bad assets faster. The other is state support in the form of capital injections and higher public spending. Both matter.

Special sovereign bonds to recapitalise lenders add a fiscal cushion. They give banks more capital to absorb losses without cutting lending sharply. Increased fiscal outlays also help demand in the economy, which eases pressure on loans and collateral values.

But support comes with constraints. Higher public spending raises fiscal burdens for the year. And a prolonged property slump could still drain both bank capital and local government revenue. Balancing market repair and state support will determine how quickly banks return to stronger profitability.

Key risks include a deepening property downturn and further external shocks that push up inflation. Those would test bank capital and loan performance. The finance ministry’s data on weaker land sales shows one transmission channel for risk.

Stabilizers include underwriters' actions to cut risky lending and the central government's readiness to inject capital and boost spending. Rating agencies and big banks themselves expect a more cautious lending stance. That should help limit fresh problem loans while asset disposals reduce existing stress.

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Policy support and more cautious lending appear to be stabilizing bank balance sheets, though property-sector weakness and local government revenue pressures keep near-term risks for lenders.

This article was created with AI assistance.