Chinese banks’ asset quality remains stable but interest margin pressures to continue : analysts

Chinese banks reported mildly higher profit growth in the year to date due to lower loan loss provisions but they are expected to face continued operational challenges

Some analysts expect the central bank to launch more easing measures to help reduce banks’ funding cost and pave the way for reduced margin pressures

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A man speaks on the phone outside the Bank of China head office building in Beijing, China. Photo:Reuters

Published: 8:30am, 2 Nov 2023Updated: 9:00am, 2 Nov 2023

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.