China’s top banks post shrinking margins in Q1

China’s Top Banks Post Shrinking Margins in Q1

By Ziyi Tang and Engen Tham

Borrowers are struggling to repay loans after three years of China’s zero-COVID policy hit the economy and Beijing has put pressure on lenders to reduce individual and company debt burdens by cutting interest rates.

Five of China’s largest lenders posted shrinking margins in the first quarter on Friday, as loan re-pricing bites.

• Industrial and Commercial Bank of China (ICBC), the world’s largest commercial lender by assets, posted a net interest margin (NIM) – a key indicator of bank profitability – of 1.77% at the end of March, down from 1.92% from the end of the prior quarter.
• Agricultural Bank of China Ltd (AgBank)
• Bank of China (BoC)
• China’s Bank of Communications Co Ltd (BoCom)
• China Construction Bank Corp (CCB)

All lenders posted flat to around 5% net profit growth with BoCom logging the highest first-quarter net profit at over 5%. AgBank came in second with 1.75% as the others posted flat net profit growth over the same period.

Non-performing loan (NPL) ratios held steady, with most lenders flat at the end of March from the end of the prior quarter, though BoC’s ticked down slightly from 1.32% at the end of March to 1.18% at the end of December last year.

“Chinese banks are likely to see further pressure on NIM, driven by mortgage repricing to reduced rates and ongoing deposit competition, as well as continued policy directives on reducing borrowers’ costs especially for micro-and small enterprises,” said Elaine Xu, Director of APAC Financial Institution, Fitch Ratings.

Gary Ng, senior economist at Natixis Corporate and Investment Bank said the banking sector may face NIM pressure as China gears itself towards common prosperity, given that the sector is one of the most profitable in the country.

While bad loans appear to be stable, analysts said NPLs may peak later.

“We expect property NPLs to peak in 2024 as the recovery process takes time, especially in lower-tier Chinese cities,” said Ming Tan, Director at S&P Global Ratings.