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Margins fall, asset quality improves at China's largest banks in Q2

China's largest banks grappled with flat or declining net interest margins in the quarter ended June 30, as they heed the government' call to lower funding costs for the real economy.

Margin pressure is likely to persist in the coming quarters, as the Chinese government required all the four largest state-owned banks by assets to credit support borrowing costs for small businesses amid slowing economic growth and the country's ongoing trade tensions with the U.S.

Among the four largest Chinese banks, Agricultural Bank of China Ltd. recorded the steepest decline in net interest margin to 2.04% as of June 30 from 2.10% in the previous quarter. It was the third consecutive quarterly decline in the lender's net interest margin.

Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. each reported a net interest margin of 2.11% for the second quarter, down 4 basis points from the previous quarter, while Bank of China Ltd.'s NIM edged up to 1.75% from 1.73%.

ICBC President Gu Shu said Aug. 29 that the bank was feeling additional pressure on its margins from the country's introduction of new benchmark lending rates to bring down borrowing costs. A day later, Bank of China Vice President Wu Fulin expressed similar concerns, saying the new benchmark rates are a key challenge facing commercial banks in the country.

The executives' comments came after China's central bank on Aug. 20 set the one-year loan prime rate at 4.25% and the five-year rate at 4.85%, which are lower than previous benchmark lending rate of 4.35%. Banks in the country reportedly need to fix lending rates with reference to the new benchmark rates on at least 30% of new loans by end-September and all new mortgages from Oct. 8.

Meanwhile, the largest banks' asset quality improved in the second quarter from the previous quarter. The nonperforming loan ratio of Agricultural Bank of China fell to 1.43% as of June 30, marking the fourth consecutive quarterly improvement. Similarly, the remaining three banks saw quarter-over-quarter declines in their respective NPL ratios in the quarter.

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