The murky balance sheets of China's banks have long spurred fears of an impending crisis, but the clean-up may already be proceeding apace, UBS said.

"Contrary to prevailing market wisdom, we believe considerable progress has been made in recognizing and dealing with the problems," Jason Bedford, an analyst at UBS, said in a note Thursday, citing analysis of 765 banks on the mainland.

"Recapitalization and bailouts have started and made unexpected (and under-appreciated) progress," he said, adding that UBS research suggested 2015 was the first year since the early 2000s with sizable bank bailouts.

China's banking sector has long spurred concerns that its non-performing loans (NPLs) were grossly underreported and that lending too often was politically directed into industries with too much capacity. Separately, in a note Thursday, Daiwa said the sector's NPL ratio in the second quarter remained flat at 1.75 percent, while large banks saw their NPL ratio fall 3 basis points on-quarter to 1.69 percent, which it attributed to large NPL write-offs and disposals during the quarter.

During the global financial crisis, China's government used the banks to inject stimulus into the broader economy. As a result, debt levels rose sharply among local governments and state-owned companies and the banks now hold high volumes of non-performing loans — a problem that is worsening as industrial profitability falls and debtors struggle to service interest payments.

In February, storied hedge fund manager Kyle Bass warned that a Chinese credit crisis would see the country's banks rack up losses 400 percent larger than the around $650 billion equity hit that U.S. banks took during the subprime mortgage crisis.

Bass was famed as one of the few major investors to correctly call the U.S. subprime housing collapse that kicked off the 2008 global financial crisis. That prescience earned him a mention in Michael Lewis' book "Boomerang," which was about the European credit crisis.

But UBS' Bedford noted that China banks' write-offs and disposal of bad assets have risen three-fold since 2013. He said that 1.65 trillion to 1.8 trillion (around $250 billion-$270 billion) worth of non-performing assets were written off from 2013-2015, citing a review of 173 banks' financials. That figure was equivalent to 2.05 percent of total loans or 142 percent of NPLs at the end of 2015.