Fitch Ratings expects the low interest rate environment in the mainland to persist, with rated domestic banks showing resilience

Fitch Ratings stated that China's low interest rate levels may persist for a longer time due to weak domestic demand and external shocks, including the Iran conflict, which will continue to put pressure on the profitability of domestic banks. However, Fitch expects the operating environment for the banking sector and the "Viability Ratings" of rated banks to remain resilient.

Fitch indicated that the resilience of rated banks is based on their stable deposit franchise capabilities, prudent asset-liability strategies, and policy settings that prioritize financial stability. The viability ratings of rated banks range from "bbb" to "b+", providing reasonable buffer space.

Although interest rates are low, Fitch believes that banks will not experience significant deposit outflows, as the sluggish real estate market and weak labor market will continue to undermine household confidence and support precautionary savings. Rated banks generally benefit from a stable customer base, extensive networks, government connections, or systemic importance. Deposit repricing and a large pool of low-cost demand deposits should also help mitigate net interest margin pressure this year.

Furthermore, Fitch believes that a long-term low interest rate environment will not significantly alter these banks' asset-liability strategies, profit compositions, or competitive dynamics. Banks are expected to maintain liquidity management discipline to avoid excessive interest rate or refinancing risks. Recent moderate growth supports their liquidity positions and capital levels, while increased financial investments are also largely allocated to government bonds and balanced by China's regulated interest rate environment.

In the medium term, Fitch believes that sustained and well-managed business and income diversification can further enhance banks' resilience in economic cycles. On the other hand, a more significant shift towards non-deposit funding or higher-risk loans and investments may weaken liquidity and risk conditions; however, under the baseline scenario, Fitch does not expect this situation to occur