China's biggest banks are likely to arrest the decline in their net interest margins (NIMs) as the cost of deposits will likely stabilize in an environment of low interest rates.
The so-called big four Chinese lenders — Industrial and Commercial Bank of China Ltd., Agricultural Bank of China Ltd., China Construction Bank Corp., and Bank of China Ltd. — posted lower NIMs in the first quarter of 2025. But with the lower interest rates also passing through to deposits, banks can expect to pay lower on their liabilities and partially offset the impact on margins.
"We expect NIM contraction to narrow as we move past the high base and see lower deposit costs," said Iris Tan, senior equity analyst at Morningstar, in a May 2 note.
Falling margins
NIM at ICBC, the world's biggest bank by assets, fell 15 basis points year over year to 1.28%, while Bank of China posted a similar decline to 1.25%, according to S&P Global Market Intelligence data. China Construction Bank posted a 17-basis-point fall in its NIM to 1.39%, and Agricultural Bank saw a 13-basis-point decline to 1.30%.
The People's Bank of China cut its one-year loan prime rate (LPR) to 3.0% from 3.1%, and the five-year rate to 3.5% from 3.6% on May 20. The one-year rate, a common reference for general lending, and the five-year rate, the benchmark for mortgages, are now at their all-time lows. The five-year LPR was cut by a total of 35 bps in 2022, 10 bps in 2023, and 60bps in 2024.
Banks typically pass lower interest rates to their loan portfolios to attract new customers and compete with their rivals. The same competitive pressures often make deposit rates more sticky.
Growth aim
The government is targeting gross domestic product growth of around 5% in 2025 after the world's second-biggest economy expanded 5.0% in 2024. The State Council, China's top executive body, issued a policy paper on March 5, seeking to promote five major areas where it would encourage the flow of financing. These include stepping up lending that focuses on technology and the environment, expanding inclusive financing, developing pension management, and enhancing digital banking.
A "low-interest-rate environment and stable macroeconomic growth will likely remain major constraints for Chinese banks for years," Benny Cheung, China south market leader, financial services at EY, told Market Intelligence during a May 13 conference. "Banks are now seeking new engines by stepping up on the so-called five business areas for future growth," Cheung said, adding that risk management would be the top priority when exploring new opportunities.
Each of the big four lenders reported slower loan growth compared to a year ago, data show. ICBC's loan book grew 8.5% in the January-to-March quarter, compared with 11.6% in the same period a year ago. Construction Bank grew 8.1%, lowest among peers, versus 11.2% in the year-ago period, while Agricultural Bank grew 10.0%, versus 13.0% a year earlier.
Both ICBC and Construction Bank reported year-over-year earnings decline of 4.0% in the first quarter of 2025, while Bank of China's net income was down by 2.9%, according to Market Intelligence data. Agricultural Bank was the only exception with a net income growth of 2.2%, the data show.
