Chinese banks face margin pressure even as economic recovery may boost profits

Chinese megabanks' net interest margins will likely remain under pressure in a low interest rate environment, though profits may stabilize as the economy improves.

A major challenge for Chinese banks in 2023 is the potential for further declines in net interest margins, particularly in the first half, Sonija Li, head of retail research at MIB Securities HK, told S&P Global Market Intelligence in an email.

"The repricing proportion of personal loans was relatively high in the first quarter of 2023, which will adversely affect the net interest margin under the declining rate environment," Li said.

Chinese banks' asset quality also faces risks from nonperforming loans. "Loan growth is expected to pick up quickly in the upcoming quarters in response to Chinese authorities calling for increased financing to enterprises, especially private ones and property developers," Li said.

Three of the four major Chinese banks — China Construction Bank Corp. (CCB), Bank of China Ltd. and Agricultural Bank of China Ltd. — posted higher year-over-year net income for the fourth quarter of 2022, as strong loan growth supported profits. Industrial and Commercial Bank of China Ltd. (ICBC) was the only one that reported a decline, with its net income down 1.9% to 94.66 billion yuan.

Full-year net profits largely met S&P Global Capital IQ consensus analyst estimates, except for ICBC, which missed estimates of 5.4% growth.

"The decline in 2022 was mainly attributable to lower net interest margin and noninterest income, while lower credit cost partly cushioned the fall," S&P Global Ratings said.

ICBC's large loan portfolio will benefit its asset quality, Ratings analysts said in a March 31 note. "A careful management of the loan mix helps keep ICBC's financial performance stable despite economic challenge," Ratings said. The bank continues diversifying away from sectors with asset quality pressure, the rating agency added.

China's weak real estate market remains a major risk for the country's banks. Still, an economic rebound fueled by credit growth will ease risks as China recovers from COVID-19. The International Monetary Fund expects China's GDP to grow 5.2% in 2023, after expanding 3.0% in 2022, below the government's target.

Property pains

China Construction Bank will likely maintain healthy earnings as nonperforming loans gradually decline in 2023 with China's economic rebound, Ratings said in a separate March 30 note. "CCB has further cut its property developer loan exposure to 3.64%, from 3.89% as of the end of 2021," Ratings said.

CCB's asset quality metrics stayed stable, Nomura said March 30. Overall, the lender's nonperforming loan ratio improved even as bad property loans rose.

Meanwhile, Bank of China's diverse portfolio will cushion property sector exposure, Ratings said. "We expect [Bank of China] will continue to feel the strain on its real estate exposure, given our view that a V-shaped property recovery is unlikely. But portfolio diversification mitigates this risk. Lower [nonperforming loans] in sectors such as manufacturing and transportation offset higher real estate [nonperforming loans]," Ratings added.

Agricultural Bank of China will also maintain revenue and profit stability over two years due to strong loan growth and cost discipline. The bank's net interest margin will likely narrow further in 2023 as it cuts financing costs for small and medium-sized businesses, Ratings said in a note on the bank's earnings.