Industrial and Commercial Bank of China Ltd. (ICBC) flagged further pressure on margins in 2024 after a sharp drop in net interest margin (NIM) dragged on annual net profit at the world's biggest lender.
ICBC on March 27 reported year-over-year earnings growth of 0.8% to 363.99 billion yuan for 2023, with a 31-basis-point (bps) contraction in its NIM to 1.61%. This contrasts with 2022, when the lender's net profit rose 3.5% even as NIM fell 19 bps over the previous year.
"NIM will definitely continue trending down in the near term as LPR [loan prime rate] will head further lower to meet the needs of the country's economy," said Yao Mingde, senior executive vice president of ICBC, citing the need to balance deleveraging and boost consumption.
Margin pressure
Chinese banks are facing margin pressure. The aggregate NIM for large commercial banks was 1.69% at the end of 2023, down from 1.98% a year earlier, according to National Financial Regulatory Administration (NFRA) data.
China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. are expected to report mixed earnings results, according to S&P Global Market Intelligence data. The banks will release results March 28.
China's 2024 economic growth target is about 5%. The struggling real estate sector, which comprises nearly a quarter of the economy, has prompted increased government support. In February, the People's Bank of China cut its five-year loan prime rate, the mortgage rate benchmark, to a record low to boost demand. But this could further pressure commercial banks' margins and increase asset quality risks.
Asset quality
ICBC will increase personal loans, including mortgages and consumer loans, to offset declines in its NIM, said Yao. The bank's 2023 net interest income fell 5.3% year over year to 655.01 billion yuan, despite 12.4% loan growth.
"We estimate ICBC's NIM may decline 14 bps in the fourth quarter of 2023 to 1.43% compared to the previous quarter," said Shengbo Tang, head of China Financial and FinTech Equity Research in a March 27 note, on lower loan yields due to LPR cuts and mortgage repricing while deposit costs remain stubborn.
ICBC's nonperforming loan ratio improved to 1.36% in 2023, outperforming the peer average of 1.29% shown by the NFRA data.
"Currently our asset quality stands in a healthy range," said Wang Jingwu, executive director and senior executive vice president at ICBC, with risk from retail credits remaining in check.
As of March 27, US$1 was equivalent to 7.23 Chinese yuan.
