Bank Balance Sheet Shift: The Era of Hundreds of Trillions in Bond Holdings

The expansion of commercial banks' balance sheets is bidding farewell to the era of being driven solely by credit.

With the shift of the real estate and infrastructure engines, effective credit demand from the real economy is under pressure, and commercial banks are generally caught in the dilemma of insufficient credit extension;

The slowdown in the growth of traditional deposit and loan businesses has forced vast amounts of on-balance-sheet funds to migrate along the balance sheet towards fund operation centers.

The central bank's first-quarter report points out that by the end of 2025, the scale of bonds held by Chinese banks will historically exceed 100 trillion yuan, accounting for 25% of total bank assets, up 7 percentage points from ten years ago. The ratio of bonds to loans has risen 6 percentage points to 35%.

A quarter of asset allocation highlights that bond investment today breaks through the previous stereotyped tags of liquidity management and prudent configuration.

But the reallocation of 100 trillion in funds is by no means a risk-free arbitrage.

When assets shift toward the bond market, it also means commercial banks' traditional real economy credit risk is subtly exchanged for market risk that fluctuates with macro interest rates.

Restricted by differences in liability costs, banks from different camps have diverged in their paths of balance sheet expansion;

Meanwhile, some institutions relying on the realization of current profits through financial account reallocation have exposed their vulnerabilities amid wide fluctuations in the bond market.

Divergence in Balance Sheet Expansion

Faced with this migration of trillions into the bond market, banks from different camps have shown dramatically contrasting paths of balance sheet expansion.

Relying on low liability costs, large state-owned banks have absorbed massive amounts of government bonds on their asset side. By the end of 2025, the financial investment assets of the Big Four have all increased by over 15% from the beginning of the year, with growth rates collectively higher than those of credit assets in the same period.

But even among the Big Four, the focus of investment asset expansion shows differences.

Agricultural Bank of China tilted most aggressively toward the investment side. By the end of 2025, its financial investment assets reached 16.32 trillion yuan, with financial investments accounting for 33.46% of total assets, and the ratio of financial investment to credit at 62.35%, both the highest among the Big Four;

Bank of China, however, showed more restraint. The scale, growth rate, and proportion of financial investment assets to total assets were all the lowest among the Big Four, and the ratio of investment to credit assets was only 42.22%, at the tail end among listed banks (41/42).

Breaking down the underlying categories in the balance sheet can more thoroughly reveal the differences in strategies between these two major banks.

Under current accounting standards, financial investment assets mainly fall into three accounts:

AC (measured at amortized cost) is used as the ballast, intended to hold until maturity and lock in steady absolute coupon income—assets in this account are shielded from secondary market price fluctuations;

FVOCI (measured at fair value with changes recognized in other comprehensive income) serves as a flexible reservoir, with underlying assets strictly marked to market, but price fluctuations recorded only in owners' equity, so as to avoid direct impact on current profit and loss;

FVTPL (measured at fair value with changes recognized in profit or loss) is purely a trading account, its fluctuations directly affect the current profit and loss. During favorable periods, gains can be realized directly from price difference, but net profits are also fully exposed to market price volatility.

Looking through, ABC's asset structure shows a heavy reliance on coupon income, with over 72.29% of its investment funds locked in the AC account by the end of 2025, mainly earning stable coupon from risk-free base assets;

Bank of China is skewed toward flexible operation, with nearly half (47.94%) of its investment funds allocated to the FVOCI account, retaining liquidity for realization and smoothing profits.

Despite structural differences, both banks maintain strict control over trading account exposure, with FVTPL accounting for only 3.41% and 7.84% respectively. Placing over 90% of funds in non-trading accounts shows that the core of their balance sheet expansion remains increasing the base of interest-earning assets.

Shifting the focus down, joint-stock banks show more obvious fragmentation in their allocations.

By the end of 2025, as much as 44.59% of Ping An Bank’s financial investment assets were in FVTPL, making its performance highly exposed to market price volatility with a strong trading characteristic; Industrial Bank, China Everbright Bank, and China Merchants Bank had more than half of their investment in AC accounts, holding fast to stable interest collection strategies.

China Post Savings Bank researcher Lou Feipeng points out that large state-owned banks have stable funding sources and lower liability costs, so their asset allocations are mainly into government and policy bank bonds, managing duration in a more prudent manner;

Joint-stock banks overall have higher liability costs, tighter funding constraints, and some institutions have relatively high allocations to credit bonds, non-standard, and equity assets, which amplifies performance volatility in turbulent markets.

Outside the major banks, small and medium-sized banks with higher liability costs and varied regional environments also display unique motivations for shifting toward the investment side.

For example, Bank of Nanjing shows a clear intention of proactively attacking.

At its performance meeting, Chairman Xie Ning admitted that banking is like rowing against the current—if you don't move forward, you fall behind—and emphasized that even slow progress means retreat.

Proactively targeting the bond market segment is the bank's incremental pivot after stabilizing the basic credit base.

In 2025, Bank of Nanjing’s loans grew 13.55% from the start of the year, financial investments by 21.35%, with both credit and investment driving, landing the bank in the top ten among listed banks on A-shares.

In contrast, another Yangtze River Delta city commercial bank—the Bank of Shanghai—appears more defensive amid weakened credit.

Due to fierce competition from regional peers like Jiangsu Bank and Bank of Nanjing, Bank of Shanghai's loan business volume, pricing, and risk indicators have all been under comprehensive pressure in recent years.

In 2025, its corporate deposits and loans grew by only -1.13% and 0.12%; its corporate NPL rate stayed at a high 1.35%; all three indicators are at the bottom among city commercial banks in the Yangtze River Delta. Its net interest margin of 1.16% is one of the lowest among listed banks;

At year-end, its financial investment asset balance stood at 140.7516 billion yuan, historically surpassing its loan balance. The ratio of investment to total assets surged to 42.54%, exceeding the loan ratio by six basis points.

In the context of not being able to compete with peers in the credit market, turning to investment may be a pragmatic choice—

After all, during the same period, Bank of Shanghai’s credit yield was 3.19%, only 0.5 percentage points above investment yield. Yet, expanding credit assets is much more difficult.

Fragile Profitability

Whether proactively attacking or defensively retreating, the industry-wide consensus is to ramp up investment;

But increasing investment also means banks’ balance sheets are tied deeper to macro interest rates.

In 2025, bond market yields fluctuated upward, with the 10-year government bond yield ending at 1.85% after an N-shaped trajectory from a low at the start of the year, rising 25 basis points, and most credit spreads narrowing passively.

With wide fluctuations, unilateral trending trades ceased. The market shifted from a slow bull to rangebound volatility, and although total cash bond trading volume increased 1.4% YoY, trading turnover in the interbank market dropped by 25 percentage points.

Amid bond market fluctuation, banks with high funding costs saw their on-balance-sheet returns substantially pulled back.

In 2025, investment income across 42 listed banks grew 18.17% YoY to 605.991 billion yuan; but due to revaluation of base assets, current fair value changes swung directly into loss from last year's 87.13 billion yuan gain.

Combining realized gains and paper fair value changes, listed banks saw their annual investment performance actually decline 1.61%, even weaker than net interest income in the same period.

This reveals the first layer of fragility in bank investment—base returns are deeply dependent on FVTPL accounts.

During 2024’s one-way bull in the bond market, investment performance among listed banks grew 29.75%, outpacing net interest income by 31.85 percentage points, with fair value changes surging by 140.84%.

The rise and fall across cycles confirms the high volatility of trading accounts—minor ups and downs in underlying asset prices are fully reflected in current profit and loss, causing profit volatility.

Take Ping An Bank, where FVTPL accounts accounted for 44.59%.

In 2024, its fair value change registered a gain of 3.104 billion yuan, boosting net profits attributable to parent by 7.5%; but in 2025, this item reversed sharply, recording a 2.518 billion yuan loss and dragging net profit down by 5.58 percentage points.

Ping An Bank is not the deepest victim of market volatility.

Statistics show that 12 listed banks in 2025 suffered fair value drag, recording reductions equivalent to more than 10 percentage points of net profit attributable to parent.

For example, Qilu Bank posted a fair value loss of -915 million yuan, with net profit at 3.128 billion yuan for the year—the trading account floating loss consumed a quarter of its profit.

It is worth noting that actually realized investment income does not entirely come from current-period trading.

To smooth out sharp swings in profit and loss, banks sped up consumption of accumulated financial ammunition in non-trading accounts during 2025’s weak bond market, constituting the second layer of investment fragility.

Of the 18.17% increase in investment income among 42 listed banks, a significant share came from realizing historical floating gains.

Wang Ziyu, a banking analyst at CICC, points out that to stabilize profit and dividend performance, Chinese banks have increasingly tended to realize gains from FVOCI and AC accounts to smooth performance.

Looking at the data: on one hand, the ratio of AC book floating gains to revenue among listed banks dropped significantly in 2025, indicating that some institutions used assets intended to be held to maturity to underpin current revenue;

On the other hand, the ratio of FVOCI floating gains to net profit also declined—off-balance-sheet floating gains in owners’ equity are being converted into current-period profit more rapidly.

Objectively, most banks dispose of old bonds to stabilize current performance—it is a routine way to smooth volatility.

But this is an advance overdraft of future financial buffer space in the balance sheet. Wang Ziyu warns that realizing floating gains in this way is forcibly rebalancing short-term and mid-term profits, and excessive realization is unsustainable.

As the buffer is consumed rapidly, this strategy may leave banks facing more severe net interest margin and capital pressure in the next macro cycle.

Duration Concerns

The volatility of accounting income and the consumption of historical floating gains stem from the magnification of market price exposure by trading mechanisms.

Lengthening bond duration is the industry's common strategy in pursuit of accounting gains.

In a normal macro environment, the yield curve slopes upward—the longer the term, the higher the interest;

But in a falling interest rate cycle, when yields of traditional 3-year/5-year assets fall below the liability cost line, banks are forced to buy super-long-term government bonds—10-year, even 30-year—to earn premium through "time for space."

Duration is not just a time measure, it is the core multiplier for asset price sensitivity to interest rates:

The longer the underlying asset term, the more falling interest rates leverage giant fair value gains, but reversal can mean sharp losses.

Driven by low rates and longer government bond tenors, commercial banks have consistently stretched out durations in their book allocations—this homogenization may push industry-wide interest rate risk exposure to a high level.

In recent years, pressured by low rates and asset shortages, commercial banks have migrated their asset allocations toward mid-to-long-term bonds, compounding duration mismatch pressure.

In a 2022 industry study, Everbright Securities noted the trend of lengthening asset allocation durations among banks, accompanied by rising mismatch pressure.

By 2025, as short-end yields approach the liability cost line, some banks have had to further increase allocations to super-long-term assets—the 10-year, even 30-year government bonds.

Industrial Research noted in May 2025 that large state-owned banks, which absorbed vast amounts of long-term government bonds, saw average financial investment durations climb to about 5.5 years, with long-term bonds above 5 years overtaking middle- and short-term bonds as the largest financial asset class;

Joint-stock and small banks’ average position duration also held at a high level around 4.7 years.

This absolute duration level is approaching Japanese banks’ "negative interest rate" era booking features.

CICC gives the data: by the end of 2025, the duration of financial investments among listed banks was 59.2 months, roughly unchanged from the previous year.

According to calculations on a 1 trillion yuan portfolio, at a 60-month duration, every 1 basis point rise in market rates means a 500 million yuan hit to bank profits;

Commercial banks with about 1 trillion yuan in financial investment assets have net profits of 10-20 billion yuan a year.

This means a mere 1 basis point fluctuation could wipe out most of a mid-sized bank’s net profit for half a month.

With compressed NIMs, commercial banks are not only leveraging on duration, but have zero tolerance for any cost across the investment chain.

Affected by higher management fees in low-rate environments, the standardization of customized bond funds, and new rules restricting banks' frequent subscription/redemption, banks’ self-operated funds reduced allocation to mutual funds by about 460 billion yuan in 2025.

Underlying asset structure changes confirm banks’ shrinking operational room in a low margin era.

When banks bet balance sheet funds on long-term bonds, they are not simply earning credit spreads across economic cycles, but also going long on the expectation of continued macro interest rate declines.

A pressure test for macro cycle reversal is hanging over banks.

Regarding future market conditions, Hu Gang, Vice President of China CITIC Bank, noted that with macroeconomic recovery expectations, stock-and-bond seesaw effects, and external uncertainties, the difficulty of bond market investment in 2026 will increase markedly, and the full year is likely to see a neutral scenario of "low rates, high volatility."

In recent years, the central bank and other regulators have repeatedly issued clear warnings about the bond market’ herd effect and long-term interest rate risk.

The arrival of the 100-trillion bondholding era marks the irreversible structural reshaping of commercial banks' balance sheets.

But when the expansion and profit pillars are overly tilted toward financial markets, crowding in duration becomes a Damocles sword dangling above the capital of the entire banking sector.

Foreign banks offer extreme examples—

In 2021, US banks lengthened portfolio duration to 8.75 years amid loose monetary policy;

Subsequently, in a period of aggressive rate hikes, huge unrealized losses hidden in AC accounts were forcibly realized due to liquidity crises, ultimately leading to Silicon Valley Bank-style capital collapse.

For domestic commercial banks, in the second half of the narrowing margin cycle, how to control the inertia of lengthening duration and maintain the capital threshold while switching between real economy credit risk and financial market risk will remain the industry's central question.

Risk warnings and disclaimersMarkets have risks; investments require caution. This article does not constitute individual investment advice nor consider any user's specific investment objectives, financial status, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their individual circumstances. Investing based on this is at one's own risk.