Industrial & Commercial Bank of China Ltd. President Gu Shu expects additional but "manageable" pressure on its margins from the country's recent introduction of new benchmark lending rates which has brought down borrowing costs.
Prior to the Aug. 17 announcement of the loan prime rates, many Chinese banks have already been facing flat or falling net interest margins for quarters amid slowing economic growth and lingering global trade friction.
The latest interest rate reform is adding pressure to banks' profitability. The People's Bank of China reportedly asked Chinese lenders to price at least 30% of their new loans with the lower loan prime rates by end-September, as well as on all new mortgages from Oct. 8.
As of end-June, ICBC's net interest margin slid to 2.29%, down 1 basis point from a year earlier. China Construction Bank Corp., the country's second-largest lender by assets after ICBC, reported Aug. 28 its end-June net interest margin fell to 2.27% from 2.34% a year ago.
At ICBC's first-half earnings call Aug. 29, Gu said the bank is "feeling the squeeze" due to the interest rate reform. But he added the lender will continue to leverage its large depositor base, which will help keep its funding costs in check.
"The decline in net interest margin is manageable, and if you look at other banks, the drop [in ICBC] is smaller," said Gu.
He added that the lender will also improve the structure of long-term and short-term loans to boost its profitability, but did not elaborate.
The loan prime rates, which are adjusted once a month and take account of lending reference rates from 18 banks, are seen as more market-based. On Aug. 20, the central bank set the one-year loan prime rate at 4.25% and the five-year rate at 4.85%.
The new rates will soon replace the benchmark lending rate which has remained at 4.35% since mid-2015 despite changes of economic conditions.
Further, largest Chinese banks are also under increasing pressure from the government to rescue troubled, smaller lenders, raising concerns over their asset quality.
In late July, ICBC's subsidiary ICBC Financial Asset Investment Co. Ltd. agreed to acquire a 10.82% stake in Bank of Jinzhou Co. Ltd. for no more than 3 billion yuan, while a unit of one of state-owned distressed-debt managers China Cinda Asset Management Co. Ltd. agreed to buy a 6.49% stake. The deal came after CCB was brought in in a government-led takeover of troubled Baoshang Bank Co. Ltd. in May.
In response to questions about potential take-over of more smaller banks, Gu said that the lender currently has not such plan.
"Our principle [for the Bank of Jinzhou deal] is that the risk should be manageable and the valuation and price is reasonable," Gu said.
As of Aug. 28, US$1 was equivalent to 7.16 Chinese yuan.
