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Chinese megabanks' earnings to get some respite from lower impairments, costs


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Chinese megabanks' earnings to get some respite from lower impairments, costs

Chinese megabanks will likely address a decline in earnings growth by relying on reduced impairment losses and expenses, after squeezed net interest margins and slowed loan growth impacted bank profits in the quarter ended Sept. 30.

The net profit of three of the four largest Chinese banks Industrial and Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd. — experienced slower growth in the July-September quarter from the previous year, according to S&P Global Market Intelligence data. The decline in net interest margins (NIMs) was the primary factor behind this trend.

Agricultural Bank of China Ltd. was the exception, with its net profit rising 8.1% year over year in the same quarter, compared with 6.4% in the previous year. NIMs dropped for all four banks during the quarter, as China's central bank lowered policy rates to support economic growth.

Meanwhile, provisions for loan losses decreased at all banks during the third quarter from the previous quarter, with Industrial and Commercial Bank of China seeing the most significant drop in provisions to 25.56 billion yuan from 122.26 billion yuan.

"We now expect earnings growth to remain stable at 3% (versus 7% and 14% in 2022 and 2021, respectively) on average in 2023, likely to be supported by lower impairment losses and a lower cost-to-income ratio," analysts at Nomura said in a Nov. 6 report. The brokerage expects China's central bank to further cut loan prime rates (LPRs) and benchmark policy rates for medium- and long-term loans in the coming quarters, which could further squeeze banks' NIMs.

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China, facing declining exports and consumption, launched measures including interest rate cuts to achieve its 2023 GDP target of about 5%. These actions have impacted bank profits, leading to NIM contraction and credit quality concerns. In October, China experienced deflation, as its consumer price index fell 0.2% from a year ago and exports declines 6.4% year over year.

NIM pressure may likely persist in the fourth quarter and in 2024 due to LPR repricing, mortgage rate cuts and stable deposit costs, according to Nomura.

"We keep our call for a further [10-basis-point] cut to the one-year LPR and 20-bps cut to the five-year LPR in the fourth quarter of 2023." This would bring the one-year rate to 3.35% and the five-year rate to 4.00% by year-end, Ho Woei Chen, an economist at United Overseas Bank, said in a Nov. 9 note. "A further cut to banks' reserve requirement ratio is also possible to provide additional liquidity."

Chinese commercial banks' aggregate NIM hit a record low of 1.74% in the second quarter, according to data from the National Administration of Financial Regulation, the new umbrella regulator for the financial services sector.

"We think there will continue to be supportive policies including further interest rate cuts and existing mortgage rate repricing to support the faltering property market and to restore consumer confidence," said Iris Tan, senior equity analyst at Morningstar. But these measures will prolong the downward pressure on NIMs, dragging bank earnings.

Slow credit growth

In addition to margin pressure, a sequential slowdown in loan growth hit profits at all the four major banks, Market Intelligence data showed. Agricultural Bank of China's low growth fell the most among the pack, by 63 basis points to 15.33% in the third quarter, while Bank of China posted the lowest decline of 24 bps to 13.44%.

Household long-term loans, primarily home mortgages, remain the biggest drag on bank credit growth even after their record low growth of 1.6% in 2022, according to Tan. "We anticipate a very slow recovery in the real estate sector through 2025," Tan said.

In September 2023, the growth of Chinese commercial banks' aggregate assets reached 9.6% and liabilities reached 9.9% — 15-month lows — according to data from the National Administration of Financial Regulation.