Chinese banks are facing a challenging period, with estimates for loan growth by 2028 being lowered due to persistently weak demand, according to a July 2025 report from Morningstar Equity Research. May 2025 saw particularly subdued loan demand, further compounded by ongoing local government debt swaps. Major banks experienced a 2-4 percentage point year-on-year decline in loan growth during Q1 2025.
Key Takeaways from Morningstar’s Report
Morningstar has cut its 2028 loan growth estimate to 6% from 6.5%, attributing this to the central bank’s policy loosening for Q1 and the expectation that “economic data likely indicates continued weak credit demand in the coming months.”
Loan growth across different bank types in March 2025—state-owned (8.9%), joint-stock (4%), city (8.1%), and rural commercial (6%)—all show a significant drop compared to the 2019-2023 credit boom, where rates ranged from 10.5% to 15%.
Total Social Financing (TSF) growth was 8.7% for Q1 2025, largely driven by a 21% increase in government bonds, the highest since 2020. However, Morningstar anticipates TSF growth will gradually slow to 7% by 2028 as property and household deleveraging continues.
The report also highlights ongoing loan risks in the retail (non-mortgage household loans) and property developer sectors. While retail risks are rising modestly, developers and retail remain “key sources of loan risk.” On a more positive note, expanded credit approvals for eligible borrowers are helping to improve developers’ non-performing loan (NPL) ratios and reduce bond default rates. Major banks with concentrated exposure to top-tier firms are expected to see loan quality improve sooner than smaller banks, with top developers experiencing a 29% year-on-year increase in financing during the first five months of 2025.
Glimmers of Hope Amidst Challenges
Despite the lending slowdown, there’s a brighter spot for Chinese banks: fee income growth is projected to turn positive in 2025. This improvement is linked to higher trading activity and stable fee rates. Policy easing measures designed to boost the economy are also expected to support overall credit quality and capital injections are seen as a long-term positive.
Morningstar forecasts that credit costs for major banks will bottom out in 2025 and gradually normalize from 2026 onwards, as net interest margin (NIM) pressures ease and banks are encouraged to implement countercyclical loan provisioning policies.
Click here for more on Banking
