Over the past two years, a bull run in the bond market and band-trading arbitrage allowed numerous city commercial banks to rely on investment returns to support strong earnings, offsetting revenue shortfalls caused by insufficient effective credit demand and the "asset shortage" environment. However, as market cycles shift, this period of bounty has come to an end.
The 2026 interim reporting season for A-share listed banks is complete, with the latest figures showing a broad downturn. Among 17 listed city commercial banks, nearly 90% reported year-on-year declines in investment returns, with the combined decrease reaching RMB 10.936 billion. Four banks saw their returns halve, and even institutions traditionally skilled at bond market trading, such as Bank of Nanjing Co Ltd, recorded a marked contraction in investment returns.
With bond market tailwinds fading, many city commercial banks are proactively adjusting their approach to offset the drop in trading gains, shifting their operational focus from capturing buy-sell spreads to holding bonds for stable interest income.
Fifteen banks report falling investment returns with four halving year-on-year
In recent years, as effective credit demand in the real economy still awaits a boost, the banking sector has grappled with an "asset shortage." Against this backdrop, numerous city commercial banks redirected their operational focus toward bond market band trading as a breakthrough for performance, creating a period of standout financial results. During the peak of the market rally in 2024, multiple banks saw explosive growth in investment returns, with some institutions reporting year-on-year growth exceeding 100% and select banks surpassing 200%. Investment returns became an increasingly significant share of total operating revenue, serving as a core growth driver.
But markets do not rise forever. In 2026, the bond market shifted into a range-bound pattern, narrowing opportunities for band trading and making it difficult for banks to profit from selling bonds at higher prices. Combined with the high base from previous growth, pullbacks in investment returns have become the norm. According to statistics compiled by Beijing Business Today covering 17 city commercial banks' investment returns for the first half of this year, the decline was widespread and substantial. Combined returns shrank by RMB 10.936 billion, with 15 banks reporting year-on-year decreases, representing over 80% of the group. Eight banks saw declines exceeding 20%, underscoring a clear cooling trend. Only Bank of Shanghai Co Ltd and Bank of Ningbo Co Ltd recorded growth.
Four listed city commercial banks experienced a halving of investment returns. Overall, in the first half of 2026, Bank of Chongqing Co Ltd reported investment returns of RMB 609 million, down sharply by 61.61% year-on-year, the steepest decline among the 15 banks. Bank of Hangzhou Co Ltd, Xiamen Bank Co Ltd, and Bank of Guiyang Co Ltd recorded year-on-year declines of 58.66%, 54.89%, and 50.02%, respectively. Bank of Nanjing, often dubbed the "king of bonds," saw investment returns of RMB 5.757 billion in the first half, down 28.8% year-on-year, while Bank of Beijing Co Ltd reported RMB 6.469 billion in investment returns, a 14.67% decline.
It is clear that leading city commercial banks, relying on more mature asset allocation systems and steadier band-trading rhythms, have partially hedged market risks but still could not escape the downward trend in returns. Commenting on the causes of the widespread decline, Wu Zewei, a special researcher at Suboan Bank, noted that the collective drop in listed city commercial banks' investment returns stems primarily from changes in the bond market environment and a phase-based adjustment in banks' trading profit models. Previously, most city commercial banks relied on bond band trading to earn spread income, a capital-gain-driven revenue stream with high elasticity that had become an important source of boosting operating income. This year, the bond market has seen increased volatility, narrowing space for band trading and making secondary-market trading profitability significantly harder. Combined with the high comparison base from concentrated realization of bond gains in the same period last year, the year-on-year declines have been amplified. Regional city commercial banks, with relatively simple investment strategies and insufficient hedging tools, have been more severely affected by market fluctuations. While leading city commercial banks can partially offset risks through mature allocation frameworks, the industry-wide trend of shrinking trading income is difficult to reverse.
A banking analyst told Beijing Business Today that market analysis often links investment return fluctuations to trading financial assets. Floating gains or losses during the holding period of trading financial assets are directly recorded in fair value change gains or losses. If a bank chooses to sell at an opportune time, previous unrealized gains are transferred from fair value change gains or losses to investment returns, creating a positive-and-negative offset in the financial statements. Based on first-half data, many city commercial banks saw stable net interest income and fee-based income, with solid overall operating revenue fundamentals. Banks did not need to realize bond investment gains to bolster current-period profits, so they proactively reduced trading asset monetization, which lowered investment return growth—this also represents a form of deliberate operational adjustment.
Coupon income rises in contrast, with Bank of Nanjing growing over 32%
Amid the broad decline in investment returns, another metric drew attention. Among the 17 city commercial banks, 11 reported year-on-year growth in coupon income from held bonds and other assets. Although disclosure standards vary across banks—some report "bond investment interest income," others list "financial investment interest income" or "debt instrument investment interest income," and a few separately disclose interest income from other debt investments—the comparative trend remains consistent.
To interpret the divergence in these financial results, one must first understand the composition of banks' proprietary investment portfolios: financial assets at fair value through profit or loss (FVTPL), financial assets measured at amortized cost (AC), and financial assets at fair value through other comprehensive income (FVOCI). In simple terms, AC represents the allocation book where banks earn coupon income; FVOCI allows banks to both earn coupons and sell when opportunities arise to capture spreads; and FVTPL is the trading book—financial assets held for trading purposes, ready to be sold to profit from price movements. Depending on trading intent, the trading book and allocation book appear in different sections of bank financial statements: the former is recorded under investment returns as capital gains, while the latter falls under interest income.
In the first half of this year, multiple listed city commercial banks displayed a distinctive pattern: shrinking investment returns alongside rising interest income from bonds and other financial assets. Focusing on Bank of Nanjing, despite the decline in investment returns, its bond investment interest income reached RMB 12.026 billion in the first half of 2026, surging 32.58% year-on-year—the fastest growth among the 17 banks. Bank of Nanjing has long been a veteran player in the interbank bond market. Data show that in 2023, trading financial assets accounted for 80.34% of its investment returns. By 2025, trading financial asset investment returns exceeded RMB 12.1 billion but had fallen to 66.34% of total investment returns. In the first half of 2026, the bank generated RMB 2.465 billion in trading financial asset investment returns, down 47.02% from the same period last year, with the share further declining to 42.82%.
Meanwhile, Bank of Nanjing has expanded its bond investment interest-earning assets. On an annual basis, from 2023 to 2025, its average bond investment balance grew consistently—approximately RMB 492.237 billion, RMB 559.568 billion, and RMB 807.397 billion, respectively. By the end of June this year, the bank's average bond investment balance had surpassed RMB 1 trillion.
Looking at another leading city commercial bank, Bank of Jiangsu Co Ltd, its investment returns also declined in the first half, but debt instrument investment interest income reached RMB 19.75 billion, up 21.28% year-on-year, an increase of RMB 3.466 billion. Additionally, among banks using the "financial investment interest income" disclosure basis, Bank of Xi'an Co Ltd, Bank of Qingdao Co Ltd, Qilu Bank Co Ltd, Bank of Suzhou Co Ltd, and Bank of Lanzhou Co Ltd all maintained positive growth in financial investment interest income, while investment returns declined year-on-year across the board. Bank of Ningbo was the only bank where both investment returns and bond investment interest income rose year-on-year, reflecting an investment portfolio that balances coupon income and trading, with adept asset structuring and trading rhythm.
Of course, not all banks were able to defend their coupon income positions. For instance, Bank of Changsha Co Ltd, Xiamen Bank, Bank of Hangzhou, Bank of Chongqing, Bank of Shanghai, and Bank of Guiyang saw coupon income decline year-on-year.
"The combination of falling investment returns and rising coupon income clearly indicates that some city commercial banks are executing a structural shift in investment strategy," Wu Zewei emphasized. The industry as a whole is proactively curbing short-term band trading, reducing reliance on volatile capital gains, and pivoting toward stable coupon income from bond holdings. This transition represents a rational adjustment by banks to a low-volatility bond market and a deliberate move to stabilize income and performance. During past stable market phases, institutions tended to trade frequently to amplify return elasticity. With current market uncertainty elevated, banks are prioritizing income stability, extending bond holding periods, and expanding high-grade fixed-income asset scales. Such strategy adjustments can smooth annual performance fluctuations, reduce the impact of secondary market conditions on operating income, and shift investment operations from chasing short-term spreads to a model of stable returns.
The banking analyst echoed similar views, noting that from an asset structure perspective, some city commercial banks have begun reducing trading-oriented FVTPL assets, deliberately diminishing the floating gains from band trading and focusing on building up stable coupon income—effectively transforming their previous reliance on bond market band trading for profits.
As the dividend fades: building a bond investment system combining stability and flexibility
The bond market's band-trading dividend was ultimately a short-term gift. Returning to stable holding and earning bond coupons is likely to become the primary market direction. Looking at industry-wide performance, Ni Jun, chief analyst at GF Securities' banking team, noted that listed banks currently present an "allocation-led, trading-supplementary" pattern in financial investment. As of the end of the first half of 2026, the 42 listed banks' proprietary investment scale totaled RMB 111.2 trillion, with allocation books accounting for 87.7% of financial investment balances (AC at 58.8%, FVOCI at 28.9%), while the trading book (FVTPL) constituted only 12.3%. By segment, large state-owned banks hold the highest allocation book share (primarily AC-type), followed by rural commercial banks (primarily FVOCI), while joint-stock banks and city commercial banks have relatively higher trading book proportions.
Ni Jun forecasts that by structural change, FVOCI will replace AC as the main incremental driver. On one hand, as bond yields decline and existing bonds approach maturity, some banks may sell AC holdings to realize gains and stabilize performance. On the other hand, under the new accounting standard, FVOCI offers greater flexibility as a business model that aims both to collect contractual cash flows and to sell the financial assets, making it increasingly favored by banks.
Facing the new normal of bond market volatility, multiple city commercial bank executives reached a consensus during 2026 interim earnings briefings: the "bond market dividend" can no longer be treated as a normalized source of profit. Bank of Nanjing has adopted a dual-track strategy of "stable base positions plus flexible operations." A business department head at the bank stated that on one front, it solidifies base holdings with a disciplined approach of building positions when yields are advantageous, dynamically optimizing tenor structure and asset class allocation. It also closely tracks curve shape and sector spreads, flexibly executing band trades and dynamically recalibrating the three-way classification of financial investments to achieve sound structure, good performance, and increased operating income. On another front, it is methodically expanding custody, precious metals, foreign exchange, derivatives, and cross-border operations to diversify revenue sources, balancing liquidity, security, and profitability across its portfolio to broaden overall returns.
"Going forward, with bond yields fluctuating at low levels in a narrow range, investment return growth will increasingly depend on refined band trading and steady coupon accumulation. Growth rates will trend toward stability, with contributions to performance shifting from high elasticity back to normal levels," the Bank of Nanjing business head said.
Xu Dengyi, president and chief compliance officer of Bank of Chengdu Co Ltd, addressed the year-on-year decline in investment returns: "In the first half of 2026, the bond market fluctuated in a narrow range. Our bond investments are primarily held to maturity to earn coupons, and our early profit-taking strategy was adjusted, resulting in lower book returns from bond investments compared with the same period last year." Xu revealed, "In the second half, we will continue to closely monitor market changes, seize opportunities for bond band trading, optimize fund product selection and investment, and concentrate holdings in high-performing products. At the same time, we will steadily advance domestic-foreign currency market linkage and the use of neutral strategies such as bond lending and interest rate swaps to continuously expand growth points for investment returns."
Wang Pengbo, chief analyst at Botong Consulting, stated directly that rising coupon income alongside falling capital gains indicates that city commercial banks are adjusting asset allocation strategies, proactively reducing the share of trading books and increasing holdings of held-to-maturity bonds. As uncertainty in band trading grows, banks are generally reducing short-term spread-chasing operations and pivoting toward stable coupon income to smooth performance fluctuations on the investment side. Moving forward, banks should optimize portfolio structures, balance the ratio between trading books and held bonds, and avoid blindly amplifying trading leverage. They should also refine interest rate risk assessment mechanisms, match duration to their liability costs, and explore stable return opportunities while controlling volatility risk.
In the current environment, the core path for city commercial banks to enhance investment returns lies in building a multi-dimensional bond investment framework that balances stability with flexibility. Wu Zewei emphasized that banks need to continuously optimize asset allocation structures, solidify the base of high-grade bond coupon income, and establish a stable revenue foundation. At the same time, they should moderately refine active trading systems, sharpen duration management and band-trading rhythms, and precisely capture staged market opportunities to modestly enhance trading gains. Institutions must also strengthen risk hedging capabilities, expand hedging tools, and reduce the performance impact of single-market volatility. Additionally, bolstering investment research systems—improving the ability to assess interest rate trends and market cycles—is essential to conduct investment operations aligned with their own risk appetites. Through a combination model of stable coupon income as the base and moderate trading gains as a supplement, investment operations can achieve sustainable and steady income growth.