For the past two years, a bond bull market and band-trading arbitrage allowed many city commercial banks to shine, as investment gains filled the revenue gap left by weak effective credit demand and the "asset shortage".

However, as the market cycle shifts, this period of bounty has now come to an end. The 2026 interim reports of A-share listed banks show a widespread downturn, with nearly 90% of the 17 listed city commercial banks reporting year-on-year declines in investment gains, which fell by a combined 10.936 billion yuan. Four banks saw their gains cut in half.

Even banks like Bank of Nanjing Co Ltd (SH: 601009), long known for its expertise in bond market trading, experienced a notable contraction in investment income. To offset the decline in trading revenue, many city commercial banks are now shifting their operational focus from chasing buy-sell price spreads to holding bonds for stable interest income.

Four Banks See Investment Gains Halved as 15 Report Declines

Given that effective credit demand in the real economystill needs a boost, the banking sector is trapped in an "asset shortage". Many city commercial banks turned to bond market band trading as a key profit engine, creating a temporary financial highlight.

In 2024, at the peak of the bond market rally, several city commercial banks saw explosive growth in investment gains. Some institutions reported year-on-year growth of over 100%, with a few exceeding 200%, making investment gains an increasingly important contributor to total operating revenue.

But markets do not rise forever. In 2026, the bond market turned volatile, narrowing the scope for band trading. With banks finding it harder to profit from "selling bonds for spreads", and compounded by the high base from previous growth, declining investment gains have become the norm.

Data from 17 city commercial banks for the first half of this year shows a broad and significant decline, with total investment gains falling by 10.936 billion yuan. Among them, 15 banks recorded year-on-year declines, accounting for over 80%, and 8 banks saw declines exceeding 20%. Only Bank of Shanghai Co Ltd (SH: 601229) and Bank of Ningbo Co Ltd (SZ: 002142) posted growth.

Four listed city commercial banks saw their investment gains halve. In the first half of 2026, Bank of Chongqing Co Ltd (SH: 601963) reported investment gains of 609 million yuan, a sharp decline of 61.61% year-on-year, the steepest among the 15 banks.

Bank of Hangzhou Co Ltd (SH: 600926), Xiamen Bank Co Ltd (SH: 601187), and Bank of Guiyang Co Ltd (SH: 601997) saw declines of 58.66%, 54.89%, and 50.02% respectively.

Bank of Nanjing, often called the "king of bonds", posted investment gains of 5.757 billion yuan in the first half, down 28.8% year-on-year. Bank of Beijing Co Ltd (SH: 601169) recorded 6.469 billion yuan, a decline of 14.67%.

It is clear that top city commercial banks, relying on more mature asset allocation systems and steadier trading rhythms, managed to hedge some market risks but still could not escape the overall downward trend in returns.

Commenting on the reasons behind the contraction, Wu Zewei, a special researcher at Suzhou Bank, noted that the collective decline stems from changing bond market conditions and a temporary adjustment in banks' trading profit models. Previously, most city commercial banks relied on bond band trading for price spread gains, which offered high elasticity and was a major revenue booster.

This year, the bond market has become increasingly volatile, with narrower trading bands and significantly higher difficulty in secondary market trading. Adding to that, banks concentrated on cashing in bond paper profits in the same period last year, creating a high comparison base that magnified the current decline.

Regional city commercial banks, with relatively simple investment strategies and insufficient hedging tools, have been hit harder by market fluctuations. Top-tier banks hedged some risk with mature allocation systems, but the industry-wide contraction in trading income remains difficult to reverse.

A banking analyst noted that market analysis often links investment gain volatility to trading financial assets. Fluctuations in their holding period directly affect fair value change gains or losses. If a bank chooses to sell at an opportune time, the paper gains shift from fair value changes to investment gains, creating offsetting accounting entries.

Judging by the first-half data, many city commercial banks posted solid net interest income and fee-based income, and their overall revenue foundations are stable. This means banks do not need to cash in bond gains to boost current profits, so they have actively reduced trading asset monetization, which in turn lowered investment gain growth. This is also a deliberate operational adjustment.

Coupon Income Rises in Contrast as Bank of Nanjing Leads with 32% Growth

Amid the broad decline in investment gains, growth in another metric has drawn attention. Eleven of the 17 city commercial banks posted year-on-year increases in coupon income from bonds and other assets held.

Although disclosure standards vary across banks—some list "bond investment interest income", others "financial investment interest income" or "debt instrument interest income", and some separately report interest income from other debt investments—the trends remain comparable.

To interpret this divergence, one must understand the structure of banks' proprietary investment portfolios: financial assets at fair value through profit or loss (FVTPL), financial assets at amortised cost (AC), and financial assets at fair value through other comprehensive income (FVOCI).

In simple terms, AC is the allocation book for earning coupons, FVOCI can earn coupons or be sold for spreads, and FVTPL is the trading book, held for price fluctuations and ready to sell.

Depending on the purpose, the trading book and allocation book appear in different sections of financial reports. FVTPL gains are recorded as investment gains (capital gains), while AC and FVOCI coupon income falls under interest income.

In the first half of this year, many listed city commercial banks showed a contrasting pattern: investment gains shrank while interest income from bond and financial asset holdings rose.

Focusing on Bank of Nanjing, although investment gains fell in the first half of 2026, its bond investment interest income reached 12.026 billion yuan, a year-on-year surge of 32.58%, leading the 17 banks.

Bank of Nanjing has long been a major player in the interbank bond market. Data shows that in 2023, trading financial assets accounted for 80.34% of its investment gains. By 2025, trading financial asset investment gains exceeded 12.1 billion yuan but had fallen to 66.34% of total investment gains.

In the first half of 2026, its trading financial asset investment gains were 2.465 billion yuan, down 47.02% year-on-year, with the proportion dropping further to 42.82%.

Meanwhile, the bank's average bond investment balance has grown steadily, from approximately 492.237 billion yuan in 2023 to roughly 559.568 billion yuan in 2024, and about 807.397 billion yuan in 2025. By the end of June 2026, the average balance exceeded 1 trillion yuan.

At Bank of Jiangsu Co Ltd (SH: 600919), investment gains also declined, but debt instrument interest income rose to 19.75 billion yuan, up 21.28% year-on-year, an increase of 3.466 billion yuan.

Among banks using the "financial investment interest income" metric, Bank of Xi'an Co Ltd (SH: 600928), Bank of Qingdao Co Ltd (SH: 002948), Qilu Bank Co Ltd (SH: 601665), Bank of Suzhou Co Ltd (SH: 002966), and Bank of Lanzhou Co Ltd (SH: 601997) all reported positive growth in financial investment interest income while investment gains declined year-on-year.

Bank of Ningbo was the only bank where both investment gains and bond investment interest income rose year-on-year, reflecting its balanced portfolio of coupons and trading, as well as strong control over asset structure and trading pace.

Of course, not all banks held the coupon line. Bank of Changsha Co Ltd (SH: 601577), Xiamen Bank, Bank of Hangzhou, Bank of Chongqing, Bank of Shanghai, and Bank of Guiyang all saw coupon income decline year-on-year.

"The combination of falling investment gains and rising coupon income clearly shows that some city commercial banks are completing a structural shift in investment strategy," said Wu Zewei. "The industry is actively scaling back short-term band trading, reducing reliance on volatile capital gains, and turning toward steady bond holding for fixed interest income."

This shift is a rational adjustment to a low-volatility bond market and a deliberate move to stabilise revenue. In calmer market conditions, institutions tend to trade frequently to amplify returns. Now, with greater uncertainty, banks are prioritising income stability, extending bond holding periods, and expanding high-grade fixed-income assets.

Strategy adjustments can smooth annual earnings volatility, reduce the impact of secondary market swings on operating revenue, and move investment business from chasing short-term spreads to steady income models.

The banking analyst agreed. She noted that from an asset structure perspective, some city commercial banks are reducing trading financial assets, deliberately downplaying floating gains from band trading, and focusing on building steady coupon income, marking a clear departure from the old model of relying on bond market band trading for profits.

Bond Market Bonanza Fades: Building a Debt Investment System Balancing Stability and Flexibility

The bond market's band-trading dividend is ultimately a short-term gift. Returning to stable holding and earning bond coupons is likely to become the market's main direction.

Ni Jun, chief analyst at GF Securities' banking team, noted that listed banks currently present a pattern of "allocation-led, trading-supplemented" financial investment. As of the end of the first half of 2026, 42 listed banks had proprietary investment of 111.2 trillion yuan, with allocation books accounting for 87.7% of financial investment balances (AC at 58.8%, FVOCI at 28.9%), while the trading book (FVTPL) was only 12.3%.

By segment, large state-owned banks have the highest allocation ratio (mainly AC), followed by rural commercial banks (mainly FVOCI), while joint-stock banks and city commercial banks have higher trading book ratios.

Ni predicts that FVOCI will replace AC as the main source of growth. This is partly because, as bond yields decline and existing bonds approach maturity, some banks will sell AC to realise gains and stabilise earnings. Additionally, under the new accounting standards, FVOCI's dual purpose—collecting contractual cash flows and selling assets—offers more flexibility and is favoured by banks.

Facing the new normal of bond market volatility, several city commercial bank executives reached a consensus at their 2026 interim results briefings: the "bond market dividend" can no longer be treated as a normal profit source.

Bank of Nanjing has adopted a two-pronged strategy of "stable core holdings plus flexible operations". A business department head explained that the bank is, on one hand, solidifying its core asset base, building positions when yields rise, and dynamically optimising maturity structures and sector allocation. It is also closely tracking yield curve shapes and spread movements for flexible band trading, while adjusting the mix across its three financial investment categories to achieve better structure, performance, and revenue.

On the other hand, it is expanding custody, precious metals, forex, derivatives, and cross-border business to diversify income sources. The overall portfolio balances liquidity, safety, and profitability, broadening total returns.

"Looking ahead, as bond yields continue to fluctuate at low levels within narrow ranges, growth in investment gains will depend more on fine-tuned band trading and steady coupon accumulation. Growth will stabilise, and the contribution to earnings will gradually return from high elasticity to normal," the executive said.

Xu Dengyi, President and Chief Compliance Officer of Bank of Chengdu Co Ltd (SH: 601838), attributed the decline in investment gains to the narrow bond market fluctuations in the first half of 2026. The bank's bond investment is primarily held-to-maturity for coupons, and its early profit-taking strategy was adjusted, reducing book gains compared to the same period last year.

"In the second half, we will continue to closely monitor market changes, seize opportunities for bond band trading, optimise fund product selection, and concentrate holdings in high-performing products. We will also steadily advance domestic-foreign currency market linkage and neutral strategies such as bond lending and interest rate swaps to broaden growth points for investment gains," Xu added.

Wang Pengbo, chief analyst at Botong Consulting, said plainly that rising coupons and falling capital gains indicate that city commercial banks are adjusting their asset allocation. They are actively reducing the trading book and increasing holdings in held-to-maturity bonds.

As band trading uncertainty rises, banks generally cut short-term spread chasing and turn to stable coupon income to smooth earnings volatility. Going forward, banks should optimise portfolio structure, balance trading books against held bonds, and avoid blindly increasing trading leverage.

They should also improve interest rate risk assessment, match duration to liability costs, and explore steady yield space while controlling volatility risk. In the current environment, the core path for city commercial banks to improve investment gains is to build a comprehensive bond investment system that balances stability and flexibility.

Wu Zewei stressed that banks need to continuously optimise asset allocation, solidify the coupon base of high-grade bonds, and build a stable income foundation. At the same time, they should refine active trading systems, fine-tune duration management and band trading rhythm to capture periodic market opportunities and modestly enhance trading gains.

Institutions also need to strengthen hedging capabilities, diversify hedging tools, and reduce the earnings impact of single-market volatility. Moreover, investment research systems should be enhanced to improve judgement on rate trends and market cycles, aligning operations with risk appetite. By combining steady coupons as a foundation with moderate trading enhancement, banks can achieve sustainable and steady growth in investment business revenue.