Net interest margins at China's national banks are expected to further improve in 2018 thanks to rising yields on new loans and stabilizing deposit rates.
In 2017 China's biggest lenders recorded increases in their net interest margins, or NIM, helping their combined net profit reach 893.68 billion yuan, 4.1% higher than 2016's 858.23 billion yuan. At Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., NIM was 2.22% and 2.21%, respectively, compared with 2.16% and 2.20% in 2016. Agricultural Bank of China Ltd.'s NIM rose to 2.28% from 2.25%.
Meanwhile, Bank of China Ltd.'s NIM rose to 1.84% from 1.83%. Zhang Qingsong, the lender's executive vice president, told a March 29 press conference in Beijing that amid climbing market interest rates in China and the Federal Reserve's rate hikes in the U.S., Bank of China used 2017 to focus on managing its assets and liabilities, increasing the proportion of both mid- and long-term loans as well as low-cost demand deposits.
Across the sector, yields on new loans began picking up in 2017 due to tightened market liquidity and rising market rates in China, said Chen Shujin, head of financial research at Huatai Securities in Hong Kong.
While the process of replacing existing loans with new loans will be gradual, "Chinese banks' NIM will keep benefiting from increasingly high new-loan yields," Chen said.
On the liability side, the four biggest banks and joint-stock banks faced diverging fates in 2017 given their different liability structures, but they are all expecting higher NIM this year, said Liao Zhiming, chief China banks analyst at TF Securities in Beijing.
Unlike the rapid pickup last year, market rates in China have been steady this year, stabilizing the liability costs of Chinese banks, Liao said.
About half of all deposits at the four biggest banks' are demand deposits, whose rate is less sensitive to market rate movements than time deposits and interbank products. That makes their asset yields rise faster than liability costs, Chen said.
What's more, "joint-stock banks are less reliant on demand deposits but more on high-cost interbank borrowing than the big four," Chen explained.
Tightened market liquidity had been affecting the interbank market before yields for new loans recovered, Chen added. She noted that after interbank borrowing costs started to rise, banks slowly began issuing new loans with higher yields to help boost NIM.
The Chinese government's efforts to crack down on shadow banking also has led to some joint-stock banks like China CITIC Bank Corp. Ltd. and China Minsheng Banking Corp. Ltd. actively shrinking their balance sheets by cutting back on interbank business last year, thus eating into NIM, Liao said.
"The deleveraging impact was more profound in 2017 and will gradually diminish this year," he noted.
As of April 12, US$1 was equivalent to 6.29 Chinese yuan.
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