Industrial and Commercial Bank of China Ltd., the world's largest lender by assets, is focusing on reducing deposit costs to stabilize its net interest margin for the remainder of 2024.
For the first half, Industrial and Commercial Bank of China (ICBC) posted a 1.9% decline in net income, totaling 170.50 billion yuan, primarily due to a 29-basis-point contraction in its net interest margin (NIM), which dropped to 1.43%. In the first half of 2023, ICBC managed a 1.2% net profit increase despite a 31-bps contraction in NIM. Its 2024 net income figure fell short of the 171.25 billion yuan estimated by analysts on S&P Global's Visible Alpha platform.
Net interest income, which makes up 78.1% of ICBC's operating income, decreased 6.8% year over year to 314.0 billion yuan, despite a 6.7% growth in the bank's loan portfolio, according to its half-year results released Aug. 30.
"With the latest cut in deposit rates in late July, the current downtrend in funding costs will likely continue, easing pressure on NIM for the entire year," ICBC President Liu Jun said during a post-results online media conference.
Central bank on easing path
The People's Bank of China has maintained an easing stance to bolster economic growth. In late July, the central bank reduced its one-year loan prime rate by 10 bps to 3.35%. The five-year rate, the benchmark for mortgages, was also cut by 10 bps to a record low of 3.85% to support the housing sector. The Real Estate Climate Index, compiled by the National Bureau of Statistics, rose to 92.22 in July, up from its record low of 92.00 in May.
Banks' deposit costs may have already declined since the central bank's April initiative to lower deposit costs, according to Harrington Zhang, China economist at Nomura. "We believe it will likely still take some time to take full effect," Zhang said in a July 25 report.
As of June 30, the aggregate NIM of China's large commercial banks was 1.46%, down from 1.67% a year earlier, according to the National Financial Regulatory Administration. The aggregate nonperforming loan (NPL) ratio for these banks was 1.24% at the end of the second quarter, compared to 1.29% a year ago.
By the end of June, ICBC's overall NPL ratio slightly improved to 1.35%, from 1.36% at the beginning of the year. The bank's NPL ratio in its real estate loan portfolio also improved marginally, decreasing to 5.35% from 5.37%, according to its results release.
"We anticipate ICBC's profitability will remain under strain over the next few quarters due to erosion in NIM and pressure in fee income," S&P Global Ratings said in a Sept. 2 note. "Lending rate cuts and a wider scope of local government financing vehicle restructuring will likely drive down the average asset yield," Ratings said.
As of Aug. 30, US$1 was equivalent to 7.09 Chinese yuan.
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