Chinese megabanks face downside risks on their net interest margins, which may begin to drag on asset quality as they prepare to report earnings for the first half of 2024.
State-owned Industrial and Commercial Bank of China Ltd., the world's largest lender by assets, is expected to earn 171.25 billion yuan in the six months ending June 30, a 1.4% year-over-year decline, according to consensus estimates on Visible Alpha, a part of S&P Global Market Intelligence. Net income is also projected to drop 1.3% to 165.21 billion yuan at China Construction Bank Corp., according to the estimates data based on at least three analyst contributions.
Meanwhile, Agricultural Bank of China Ltd.s first-half net income could grow more than 3% year over year to 137.58 billion yuan, while Bank of China Ltd.'s could increase by the same rate to 123.83 billion yuan.
Lenders face weak demand and increased margin pressures after the People's Bank of China surprised markets with interest rate cuts in late July. The central bank cut its one-year loan prime rate by 10 basis points to 3.35%. The five-year rate, often seen as the benchmark for mortgages, was also reduced by an equal measure to an all-time low of 3.85%. A prolonged downturn in the property market has dragged on banks' earnings as they support the government's goal of growing GDP by around 5.0% in 2024.
Write-backs of previous provisions will likely cushion Chinese banks' bottom lines. Chinese banks, especially state-owned lenders, tend to keep provision coverage well above regulatory requirements, Louisa Fok, Hong Kong-based China equity strategist at Bank of Singapore, said at a July 23 event.
Loan loss provision, an expense set aside to cover potential losses on uncollected loans, provides a window into a bank's overall financial health. Chinese commercial banks are required to maintain a basic coverage ratio of 150%, according to the People's Bank of China
Net interest margin (NIM), a key component of bank's interest income, will likely contract further, according to Market Intelligence data.
"At the current stage, NIM performance is highly dependent on (loan) price-volume and deposit cost decline," said Shen Hu, senior research analyst at Hong Kong-based brokerage CLSA, in an Aug. 2 note. "We failed to spot positive signals in loan pricing," Shen added.
In the first half of 2024, three of the big four banks will likely maintain their nonperforming loan (NPL) ratio, a measure of credit quality, while Bank of China will likely be the only lender whose NPL ratio is in decline, Market Intelligence data showed. Analysts, however, expect NPL ratios to increase in the second half of the year.
"We expect no abrupt rise in property NPLs," said Shen, and corporate loan risks would remain stable. "However, we are increasingly concerned by retail loan quality. We expect more NPL formations on the retail side," Shen said.
By the second quarter of 2024, the aggregate NIM of large commercial banks in China stood at 1.46%, or 21 basis points lower than a year earlier, according to the National Financial Regulatory Administration. NPL ratio stood at 1.24%, a year-over-year decline of 5 basis points.
As of Aug. 19, US$1 was equivalent to 7.14 Chinese yuan.