China's megabanks expect net interest margins (NIMs) to fall further in the second half of 2023 as weakness in the world's second-biggest economy may prompt further policy easing.
All of the so-called big four lenders — Industrial and Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. — reported declines in their NIMs for the first six months of 2023, attributing this to a fall in lending rates due to policy easing, while deposit rates stayed relatively sticky.
ICBC, the world's biggest lender by assets, on Aug. 30 reported a 33-basis-point year-over-year decline in its NIM in the January-to-June period, to 1.52%. Comparatively, Agricultural Bank reported a 36-basis-point decline to 1.66%, Construction Bank said its NIM fell 30 basis points to 1.79% and Bank of China's NIM was squeezed 9 basis points to 1.67%.
"There are still downsides to our NIM in the second half of 2023, not only because the authorities keep guiding policy rates lower, but also the potential downward adjustments of the mortgage rates in the existing portfolio," Fu Wanjun, vice chairman and president of Agricultural Bank, said during an Aug. 29 results conference.
Property weakness
China's property sector, which makes up nearly a quarter of the nation's gross domestic product (GDP), has seen fresh troubles recently, with China Evergrande Group seeking bankruptcy protection in the US and Country Garden Holdings Co. Ltd. looking to defer payments on its bonds. Exports fell 14.5% year over year in July, in another challenge for the $17.96 trillion economy. The People's Bank of China (PBOC) in mid-August cut its policy rates for the second time in two months to prop up economic support.
Chinese commercial banks' aggregate NIM was at a record low of 1.74% in the second quarter of 2023, the National Administration for Financial Regulation, the new umbrella regulator for the financial services sector, said in August.
"The sectorwide NIM is still trending down," ICBC President Liao Lin said during a results conference on Aug. 30, although there were signs that the pace of decline was easing amid stabilizing deposit rates.
ICBC's net profit in the first half of 2023 rose 1.2% year over year to 173.74 billion yuan, helped by lower impairment losses on assets that offset a decline in interest income. ICBC had reported a net profit of 90.16 billion yuan in the first quarter, almost unchanged from 90.15 billion yuan in the same period of 2022.
Construction Bank reported first half net profit grew 3.4% year over year to 167.34 billion yuan, while Agricultural Bank reported a 3.5% gain to 133.23 billion yuan. Bank of China reported a 0.8% gain in net income to 120.10 billion yuan. Chinese lenders typically do not announce quarterly financial details.
Asset quality
Despite continued problems with the country's property sector, all four megabanks kept their nonperforming loan (NPL) ratios largely steady. ICBC's NPL ratio was 1.36% as of June 30, against 1.38% at the same time last year. Bank of China reported the biggest drop in its NPL, down 4 basis points to 1.28%.
"We expect the peak of the property developer NPL formation rate has passed after the 138-basis-point increase in developer NPL ratio in the second half of 2022," Iris Tan, senior equity analyst at Morningstar, said in an Aug. 24 note. Industrywide property credit quality will remain pressured amid increasing property bonds maturity during the first three quarters of 2023, Tan said.
As of Aug. 29, US$1 was equivalent to 7.28 Chinese yuan.
