China’s banking sector will continue to navigate a complex operating environment in 2026, balancing the dual mandates of supporting economic growth and preventing systemic risks. We expect the sector’s credit risk profile to remain broadly stable, albeit with intensifying polarization among institutions. While large state-owned banks maintain strong capital buffers and resilient asset quality, supported by recent government capital injections, smaller regional banks face mounting pressures. A prolonged low-interest-rate environment has squeezed net interest margins (“NIMs”) to historical lows, weighing heavily on banks’ profitability and internal capital generation. Consequently, lower-tier banks with weaker asset-liability management and greater exposure to vulnerable borrowers are increasingly relying on external capital instruments, raising concerns over the risks associated with hybrid capital instruments. Looking ahead, the sector’s asset expansion will likely moderate as it transitions towards structural optimization, with well-positioned national players expected to further enhance their market leadership.