Chinese megabanks face weak earnings amid margin headwinds

Chinese megabanks are expected to report a 2023 earnings hit, particularly as declining interest rates put pressure on net interest margins, S&P Global Market Intelligence data shows.

Net profit at Industrial and Commercial Bank of China Ltd., the world's largest lender by assets, is expected to have fallen 1.2% to 356.27 billion yuan in 2023, according to the mean analyst estimate on S&P Capital IQ Pro. Bank of China Ltd. may report a similar decline to 224.61 billion yuan, while Agricultural Bank of China Ltd. is forecast to have had near-zero earnings growth. China Construction Bank Corp., China's second-largest lender by assets, could report growth of 2.9% to 328.50 billion yuan, the estimates show.

Earnings are expected to revert to growth in 2024.

Of the major operating metrics, net interest margin (NIM) of the so-called big four banks is expected to have shrunk 15-30 basis points, according to the estimates. Bank of China's NIM, for example, is estimated to have declined to 1.62% in 2023 from 1.76% in 2022, while China Construction Bank may report a fall to 1.72% from 2.02%. NIMs are likely to edge lower over 2024 and 2025, though the decline may be less steep. The banks are due to report their 2023 earnings toward the end of March.

"NIM outlooks remain quite challenging given the pressure from [mortgage] loan repricing, weak consumption demands and local government financing vehicle loan restructuring," said Iris Tan, senior equity analyst at Morningstar.

Major Chinese commercial banks' aggregate NIM declined to a record low of 1.69% in the final quarter of 2023, according to National Financial Regulatory Administration data, against 1.74% in the first quarter.

Lending growth in the economy is expected to have slumped to 4.54% in 2023 from 10.11% in the previous year, according to Market Intelligence estimates. Aggregate lending growth is expected to slow further to 2.68% in 2024 before a recovery in 2025.

China in early March set its 2024 gross domestic product growth target at about 5% after beating a similar aim for 2023 with 5.2% GDP gain. Achieving the 2024 target may be a challenge amid weakness in the property market, analysts said.

The People's Bank of China cut its five-year loan prime rate, the benchmark for mortgage rates, in February to an all-time low of 3.95% to spur demand in the real estate sector. The nation's real estate climate index, which measures the health of the sector, also fell to an all-time low in February, hitting 92.13 versus 93.34 in December 2023, according to the National Bureau of Statistics.

"We expect two [loan prime rate] cuts in 2024," Tan said. Tan expects a similar scale of NIM compression in 2024 as in 2023. Chinese banks' NIMs could "stabilize or moderately recover in 2025 as consumer credit demands pick up," Tan added.

In terms of earnings growth, Tan expects the first two quarters of 2024 will see the greatest pressure given the high base of comparison and the property market downturn.

Silver lining

Aside from NIM, most operating metrics at the big four banks for 2023 will likely trend in the right direction.

"On profit growth, we expect banks to report divergent trends" as revenue growth could be improved with help from trading income, despite the expected NIM contractions, J.P. Morgan analysts said in a March 14 note, adding that the big four state-owned banks have better earnings visibility.

The four megabanks are likely to reduce their nonperforming loan ratios further in 2024, indicating that risk control remains a priority for the lenders. The aggregate nonperforming loan ratio at China's commercial banks was 1.59% in the fourth quarter of 2023, versus 1.62% in the first, according to the latest National Financial Regulatory Administration data.

As of March 22, US$1 was equivalent to 7.23 Chinese yuan.