Chinese banks' net interest margins are likely to remain under pressure throughout 2024 despite signs of stability in the first quarter as monetary policy stays accommodative.
China's big-four lenders by assets — Industrial and Commercial Bank of China Ltd., Agricultural Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd. — posted year-over-year declines in net interest margins (NIMs) and earnings in the January-to-March period, but the declines were shallower than the previous quarter. ICBC, the world's biggest lender by assets, improved its NIM by 2 basis points over the previous three-month period to 1.43%, the data show.
"We expect NIM to continue to decline quarter on quarter as new loans are priced at lower rates after the loan prime rate (LPR) cut in 2024 and intense competition for retail loans, which will lead to lower retail loan pricing," said Iris Tan, senior equity analyst at Morningstar. Further cuts in deposit rates, measures to reduce high-cost corporate or institutional deposits, and trends in retail credit demand will need to be watched, Tan added.
The People's Bank of China cut its five-year LPR, the benchmark rate for mortgages, to a record low of 3.95% in February to boost house sales. The central bank was quoted by the China Daily in an April 19 report as saying it has stepped up efforts to encourage financial institutions to pursue a balanced credit expansion throughout the year with "room for future monetary policy adjustments."
While several global central banks have tightened monetary policy since inflationary pressures started to build in late-2022, China's central bank has remained accommodative. Economists believe the global interest rate cycle is about to turn and central banks will start cutting rates later in the year when they are more confident inflation is under control. The turn in the global monetary policy cycle will likely give China room to ease further, adding pressure to lenders' NIMs.
Falling earnings
All the big-four lenders reported year-over-year declines in earnings in the first quarter, Market Intelligence data show. The declines ranged from 1.6% at Agricultural Bank to a drop of 2.9% at Bank of China. Measured over the previous quarter, Construction Bank and Agricultural Bank's earnings grew by double-digits, while ICBC's and Bank of China's earnings declined.
The world's second-biggest economy expanded 5.3% year over year in the first quarter, staying ahead of the government's full-year aim of growth around 5%. Analysts and economists expect the central bank to stay accommodative with its monetary policy as it seeks to support economic growth. Chinese authorities are likely also mindful of a downturn in the property market, which accounts for nearly a quarter of the gross domestic product.
"The first quarter NIM is better than market expected. This was attributed to banks' efforts to remove high-cost deposits and lower deposit costs helped by the previous deposit rate cuts," said Tan.
The uncertainties around NIM are still centered around the size and pace of how deposits are repriced for the rest of the year and the lingering impact on loan rate driven by policy rate change, according to a Goldman Sachs May 9 note. The bank still sees widening NIM divergence among banks, with regional banks outperforming large state-owned banks given both shorter asset and liability duration, which make NIMs reset greater and faster.
Slower loan growth
Loan growth among the big four banks continued to ease in the January-to-March quarter. The Agricultural Bank and Bank of China posted declines of 1.5 percentage points to 13.0% and 12.3%, respectively, according to S&P Global Market Intelligence data. Loan growth at Construction Bank slowed by 1.4 percentage points to 11.2%.
In April, Chinese banks extended in aggregate 730 billion yuan in new yuan bank loans, down sharply from 3.09 trillion yuan in March, according to central bank data.
"The authorities recently revised the way of measuring GDP in the financial sector, which lowers the incentive for banks to over-report loan data," said Lu Ting, chief China economist at Nomura, adding that credit demand remains quite weak in China as the property fallout drags on.
"We expect sector-wide loan growth at around 10% for 2024, down from 10.6% in 2023," said Morningstar's Tan, with the big four banks, having seen faster-than-average loan growth since 2022, continuing to outperform peers in terms of growth rates.
As of May 20, US$1 was equivalent to 7.23 Chinese yuan.