The report by PwC, which surveys financial results for the first half of the year for 39 A-share and H-share listed banks, said the pace of growth of net profit slowed year-on-year, and profit margins also shrank.

Except for large commercial banks, which are Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Agricultural Bank of China Ltd, Bank of China Ltd, Bank of Communications Co Ltd, and Postal Savings Bank of China Co Ltd, the overall return on assets has dropped to less than 1 percent due to tightened market conditions and regulation.

The total assets of these listed banks were 161.98 trillion yuan ($24.4 trillion), representing 4.21 percent growth from the end of 2016.

The value of outstanding non-performing loans reached 1.3 trillion yuan, up 4.24 percent from the end of 2016, while the non-performing loan ratio was 1.6 percent, down 0.05 percentage points from the end of 2016.

Retail banking has become one of the major growth drivers for banks. Retail banking income represented 38 percent of the total income for large commercial banks in the first half of 2016, while the proportion grew to 39 percent in the first half of 2017. The growth of retail banking income is more obvious in joint-stock commercial banks, rising from 33 percent to 39 percent in the same period.

When interest margin shrinks and net interest income goes down, other income channels, particularly intermediate income, such as fee and commission income, will take a greater portion of the income mix, according to the report.

"As the financial market is further market-oriented, lenders' capability on pricing, cost control and serving clients with tailor-made products and tailor-made prices will become major areas of competition," said Jimmy Leung, PwC China Financial Services Leader.

The foundation of the banking industry is to serve the real economy, and inclusive finance is an important booster for banks' transformation, he said.

According to a research note by CITIC Securities, banks' performance will remain stable as the macroeconomic environment is improving and is supported by real economic growth, although more slowly than in previous years.

"Steady and stable growth remains the key tones for China's economic growth," the report said.

According to Dong Ximiao, executive head of the research institute of Hengfeng Bank Co Ltd and a banking studies expert, commercial lenders need to improve risk management and capital adequacy management as these two aspects will remain major challenges for banks, particularly smaller ones.