By Ziyi Tang, Engen Tham and Selena Li
BEIJING/SHANGHAI (Reuters) -China’s major state-owned banks have warned net interest margins will face increased pressure for the rest of the year as the world’s second-largest economy grapples with deflation and global economic volatility.
The sector’s profit margins have been under pressure since the COVID-19 pandemic, weighed down by successive central bank interest rate cuts to boost the slowing economy and weak loan demand.
All of the country’s top five banks, among the world’s largest lenders by assets, reported lower first-half margins in earnings reports on Friday. Net interest margins are a key gauge of banks’ profitability.
“In the second half of the year, Bank of China, like its industry peers, faces common pressures and challenges, but we are confident in actively responding to them and maintaining overall stable business performance,” Bank of China President Zhang Hui said at a briefing following its results.
“In the low interest rate environment within China, this is a common challenge for everyone.”
Bank of Communication’s margins will remain under pressure in future, Zhou Wanfu, the lender’s executive vice president said. However, he added the rate of decline will slow compared with that in the past two years.
Industrial and Commercial Bank of China’s (ICBC), China Construction Bank Corp, China’s Bank of Communications Co Ltd, Bank of China Ltd and Agricultural Bank of China’s all reported a decline in net interest rate margins for the past six months.
Chinese banks’ net interest margin (NIM) shrunk to a record low of 1.42% as of end-June, official data showed, below a 1.8% threshold regarded in the industry as necessary to maintain reasonable profitability.
The five banks posted their first-half earnings on Friday after Hong Kong and mainland China financial markets closed.
Net profit results among the group were mixed, with Agricultural Bank recording a 2.7% lift and Bank of Communications posting a 1.61% increase which was well above analysts’ forecasts.
The remaining three said net profit fell between 0.85% and 1.4%. China Construction Bank’s decline came against analysts’ expectations that its net profit would increase.
The reports also showed non-performing loan values remained relatively flat in the past six months, despite concerns about deteriorating asset quality, especially for struggling smaller businesses and consumers, and exporters facing sharply higher U.S. tariffs.
In a move to bolster the banking sector’s stability and ensure flow of credit to the economically-crucial sectors, four of China’s largest state lenders in March unveiled around a $72 billion recapitalisation plan.
Besides lower interest rates, local banks face mounting pressure to offer cheaper loans or easier repayment terms to help struggling businesses, further compressing profit margins. Outstanding yuan loans rose 6.9% in July from a year earlier, a record low.
The ailing property sector, once a key growth driver, remains a major challenge for lenders.
The risk of the “unwinding of the real estate sector continues,” said Wu Jian, vice president of Bank of China.
“Looking at newly emerging non-performing loans, the real estate sector remains the top industry for new non-performing loans domestically,” Wu said.
China’s property market has been stuck in a severe slump for more than four years, with declining prices, sales, new investment and construction starts weighing on economic growth. Analysts are unsure when conditions will bottom out.
“We’ll focus on credit risk management in the real estate sector,” said AgBank President Zhiheng.
($1 = 7.1529 Chinese yuan)
(Reporting by Ziyi Tang, Engen Tham, Selena Li; Writing by Scott Murdoch; Editing by David Goodman and Kim Coghill)
