A man holding a mobile phone walks past a Bank of China branch in Guangzhou, Guangdong Province, China, Thursday, March 27, 2014.
Brent Lewin | Bloomberg | Getty Images
China’s largest state-owned banks are likely to see their record-low profit margins decline further as Beijing’s broader economic stimulus package takes effect, analysts say.
The net interest margin (NIM) of China’s “big four” banks is a key indicator of bank profitability— Industrial and Commercial Bank of China (ICBC)CreditSights analysts said in a report that China Construction Bank, Bank of China, and Agricultural Bank of China – will fall by an average of about 20 basis points annually in the first nine months of 2024.
Industrial and Commercial Bank of China is the world’s largest bank by assets and the only major bank among the four major banks to publish reports. Flat NIM Compared with the previous quarter, the third quarter was 1.43%. Still, the figure is 18 basis points lower than at the beginning of the year.
Among smaller rivals, Bank of China and China Construction Bank posted profit margins of 1.41% and 1.52%, respectively, down from 1.44% and 1.54% in the previous quarter.
Amid economic slowdown, China $60.6 trillion banking industry The company has been grappling with declining profitability amid pressure from falling mortgage rates and sluggish demand for credit.
At the end of June, the overall profit margin of commercial banks dropped to 1.54%, a record low. According to official data from the National Financial Supervision Bureau. This is much lower than 1.8% threshold Regulators consider this necessary to maintain reasonable profitability.
Since late September, Beijing has stepped up monetary stimulus, forcing big banks to offer cheaper and faster loans to ease a protracted housing crisis and massive local government debt.
Major banks are awaiting Beijing’s recapitalization package to help replenish capital and strengthen their ability to support economic recovery.
“We expect net interest margins to contract slightly in the fourth quarter and to see a larger decline in the first quarter of 2025,” CreditSights analyst Karen Wu told CNBC.
The forecast is consistent with the annual forecast Morningstar Analyst. They expect state-owned banks’ net interest margins to contract by 15-25 basis points in 2024 and by “mid-to-high single-digit basis points” next year.
Interest rates fall
In recent months, the People’s Bank of China The central bank launched a series of monetary easing measures, including a 20 basis point reduction in the 7-day reverse repurchase rate and a 25 basis point reduction in the 1-year and 5-year loan prime rates (LPR).
The central bank has also slashed existing mortgage rates while reducing the amount of cash banks need to hold as reserves.
Kenny Lim, China banking analyst at UOB Kay Hian, said the cuts prompted banks to lower deposit rates in hopes of lowering funding costs and cushioning the blow from already record low profit margins.
However, based on last week’s earnings reports, most banks expect the squeeze on net interest margins to be “neutral” in the long term. This is because “the impact of lower mortgage rates and lower LPR on net interest margins will be mitigated by lower reserve requirements and deposit interest rates,” said Vivian Xue, head of Asia Pacific banking at Fitch Ratings.
However, banks take less time to lower lending rates compared with deposits, which can only be repriced upon maturity, Lin said, reiterating the near-term pressure on bank margins.
soft loan demand
Analysts said sluggish credit demand has yet to show signs of recovery as households and businesses remain cautious about spending.
Total financing in China (broad credit measure) Showing a year-on-year downward trend 12.6% first nine monthsNew RMB loans in September alone fell by 22.2%.
“With credit growth still in contraction, it is too early to declare an economic turnaround.” ING Bank said in the report.
Jason Hsu, founder and chief investment officer of Rayliant Global Advisors, told CNBC Pro last month that Chinese authorities need to do more to stimulate the “initial credit impulse,” but that impulse is still lacking. “Cheap credit is available, but people are not ready to borrow.”
He added that any recovery in lending over the next six months is likely to be “very incremental.”
Capital restructuring takes center stage
China originally planned to inject additional capital into six major commercial banks. A senior financial regulatory official said September, but no details on size or timeline were revealed. Bloomberg later reported The scale of the recapitalization could be as high as 1 trillion yuan ($142 billion).
Any major fiscal stimulus is expected to be approved by the Standing Committee of the National People’s Congress this week. Earlier this week, Pan Gongsheng, governor of the People’s Bank of China The central bank said Plan to maintain supportive monetary policy.
“Chinese banks need to recapitalize to survive with low net interest margins,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis. . Otherwise, these banks will not be able to “mediate any stimulus measures that may arise.”
The move, if implemented, would be the first time Beijing has injected capital into its major banks since the 2008 global financial crisis.
Iris Tan, senior equity analyst at Morningstar, said in a report that the capital injection could provide downside support to credit growth, thereby boosting investor confidence.
About The Author
