(Yicai) May 7 -- Chinese banks saw a sharp year-on-year rise in investment returns in the first quarter, largely thanks to higher allocations to bonds, which helped to offset a decline in traditional revenue streams. But this bond-fueled growth might not be sustainable, industry sources caution.

Investment returns surged 25 percent to CNY176.2 billion (USD24.4 billion) in the January to March period at the 100 banks that have so far released first-quarter earnings, accounting for 11.8 percent of their operating income, according to Enterprise Early Warning, a platform that tracks corporate risk. A year ago, the figure was CNY140.4 billion, or 9.2 percent of operating income. The banks’ combined first-quarter revenue dipped 1.3 percent to CNY1.49 trillion (USD205.5 billion).

The jump in investment income was mainly due to banks putting more money into bonds and the large number of government bonds that have been issued recently, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance. Since government bonds are backed by the state, they are considered to be very safe and are now a popular asset allocation choice for banks.

While there was a small correction in the bond market last quarter, some lenders locked in gains by cashing out in the wake of last year’s bond rally, the insiders said, adding that whether these gains can continue remains to be seen.

“The strong growth in banks’ income from investments that we saw in 2024 was thanks to specific market conditions, and will be difficult to repeat in the future,” Dong said.

Fifty lenders invested CNY94.1 trillion (USD13 billion) last year, more than 85 percent of which went into bonds, according to data from the lenders compiled by Enterprise Early Warning. They invested CNY5.5 billion (USD761 billion) in government bonds alone.

The current market will test the ability of banks to spot good investment opportunities and manage the average maturity of their bond portfolios, according to a recent report by UK professional services firm Deloitte. With bond market rates falling overall, banks need to pay closer attention to how well their bond portfolios are performing and which bonds are worth buying, the report said.

Some analysts remain upbeat, however. The bond market is likely to continue to be affected by tariffs, economic fundamentals, and policies this month, said Liu Yu, chief economist of Huaxi Securities, adding that if investment expands accordingly, this could possibly bring about a big rally in the bond market in May.

Editor: Kim Taylor