Chinese commercial banks recorded a rare, modest uptick in net interest margin (NIM) in the second quarter of 2026, marking the sector’s first quarterly expansion in the profitability indicator since 2022, even as underlying loan demand remained weak. Average NIM for commercial banks edged up by 0.01 percentage point to 1.41 per cent in the June quarter, from 1.40 per cent in the first quarter, according to data released by the National Financial Regulatory Administration on Friday. Performance diverged across sector tiers. State-owned lenders, city commercial banks, rural commercial banks and private banks all posted quarter-on-quarter gains, while joint-stock banks were unchanged and foreign banks saw margins narrow further. The margin recovery, however, faces immediate tests from subdued borrowing appetite. New yuan loans contracted by 340 billion yuan (US$50.4 billion) in July – a sharper drop than the 50 billion yuan decline recorded a year earlier, central bank data showed. Total social financing rose 1.4 trillion yuan in July, beating market expectations, as accelerated government and corporate bond issuance offset weaker bank lending, analysts said. “This ongoing trend of weak loan demand is likely to put pressure on banks’ balance sheet expansion, asset yields and NIM in the second half,” wrote Johnny Xie, an analyst at Deutsche Bank, in a research note on Tuesday. That pressure could be partly offset by falling deposit costs, as savings continued to migrate to non-bank institutions, as well as investment income tied to a wave of technology listings, Xie added. Protecting margins has become a key policy priority, placing tighter constraints on future benchmark rate cuts. In its second-quarter monetary policy report, the People’s Bank of China pledged to strengthen self-disciplinary pricing mechanisms, curb disorderly market competition, and diversify loan benchmarks to lower real borrowing costs without eroding bank capital.