Chinese banks will continue to grapple with interest margin pressures in the fourth quarter of 2023, analysts said, after the sector reported lacklustre earnings in the nine months ended September amid macroeconomic headwinds and a prolonged property slump.
The Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), China Construction Bank (CCB), Agriculture Bank of China (ABC), and the Bank of Communications (Bocom) saw “mild net profit growth” in the first nine months of 2023, with ICBC recording the lowest year-on-year (YOY) growth of 0.8 per cent, and ABC the highest at 5 per cent, research firm CreditSights said in a note.
The main growth driver was the lower level of loan loss provisions, and banks are expected to face continued operational challenges throughout the fourth quarter of 2023, it added.
“The lacklustre results are due to a combination of rising liability yields due to rapid growth of retail term deposits and falling loan yields ,” said Jason Bedford, a specialist on the China financial system. “There is an offset though. Banks got rid of an awful lot of bad debt since a clean-up kicked off in 2016 and as a result we are seeing progressively lower impairment charges from bad debt disposals. How long that lasts for though given slower growth is hard to say.”
People walk past a branch of Industrial and Commercial Bank of China (ICBC) in Beijing, China April 1, 2019. Photo: Reuters
Net interest margins (NIM), a key gauge of a lender’s profitability and growth, continued to be the main earnings drag, said Morningstar analyst Iris Tan in a note.
“We expect NIM pressures to remain significant in the coming two quarters on migration to time deposits, mortgage rate adjustment, and loan repricing following 2023’s interest rate cut, though new loan pricing has shown signs of stabilisation in the third quarter,” she said.
‘Pain could be too much’: China’s regional banks facing US$300 billion loss
‘Pain could be too much’: China’s regional banks facing US$300 billion loss
Creditsights analysts said Chinese banks are expected to face continued downward pressure on their NIMs in the last quarter of 2023, as well as into the 2024 financial year, due to a combination of factors including loan prime rate (LPR) cuts and foreign currency funding costs. LPR is the lending rate offered by commercial banks to their highest-quality customers, and serves as the benchmark for other loan rates.
“Despite our belief that China banks’ NIM downtrend has not yet bottomed out, we see PBOC (People’s Bank of China) launching more easing measures to help reduce banks’ funding costs,” said Citigroup analysts in a note.
Analysts say these expectations were raised after the PBOC’s media briefing last month where Zou Lan, the head of monetary policy department, vowed to strike a balance between lowering borrowing costs for the real economy and preserving China banks’ profitability to maintain lending support sustainability for the real economy.
Most big banks lowered their provisioning to protect their bottom line, although Bank of China increased its provisions by 10.1 per cent, to 91.1 billion yuan (US$12.5 billion). This was done to prepare the bank for macroeconomic challenges and increased risks in its overseas businesses, wrote CreditSights analysts, citing bank management.
Asset quality has remained stable for the five banks in the first nine months of 2023, but as the lenders began to focus on loan extensions to property developers and local government financing vehicle (LGFV), their asset quality might be negatively impacted, they said.
But some analysts said the impact would be greater on profitability.
“Ongoing LGFV debt resolution allows LGFVs to use longer-duration and cheaper-cost debt to swap out existing debt,” Citigroup analysts said. “Hence, the negative impact on China banks will reflect more on banks’ NIM rather than asset quality.”
LGFVs are investment platforms set up by China’s municipal governments to support local infrastructure and social welfare projects. With local governments facing increasing cash-flow problems because of the crisis in the property sector, LGFV debt has ballooned to US$9 trillion and with it the risk of defaults has surged.
As China gears up to issue 1 trillion yuan of sovereign debt to support local government investments in infrastructure projects, the banking sector may face further liquidity challenges, as banks are expected to be the major buyers of the central government bonds, warned CreditSights analysts.
