China’s top banks face squeezed margins amid calls to help economy grow

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BEIJING — Leading Chinese banks gearing up to heed Beijing’s call to boost lending to the real economy and the indebted real estate sector are likely to face squeezed profit margins in the second half of the year, analysts said. bankers and analysts.

Five of China’s largest state-owned banks posted modest profit gains in the second quarter. Four of the banks, except the Bank of China, however, reported declining net interest margins, a key indicator of bank profitability.

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The gloomy outlook for China’s banks comes as the world’s second-largest economy narrowly avoided contracting in the second quarter as widespread COVID-19 lockdowns and a slump in the property sector severely hurt consumer and business confidence.

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With economic momentum slowing, Beijing has unveiled a series of interest rate cuts in recent months and stepped up pressure on lenders with new instructions to increase lending.

Falling asset yields due to lower benchmark interest rates and continued competition for deposits, a key source of funding for Chinese banks, means banks’ interest margins will suffer greater pressure, analysts said.

The Chinese government has asked banks to support the country’s cash-strapped real estate sector, which accounts for nearly a quarter of gross domestic product.

“Now they are being told to support because the sector is going to (need) help…and I think there is no worse time because interest rates are down and the net interest margin has shrunk…banks have much less room to maneuver,” said Alicia García Herrero, chief Asia-Pacific economist at Natixis.

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Tighter betting interest margins – how much banks earn in interest on loans compared to what they pay in interest on deposits – will affect their profitability, leading to lower dividends for shareholders and a weakening of the market confidence.

Four of China’s Big Five banks – China Construction Bank Corp (CCB), Agricultural Bank of China (AgBank), Bank of Communications (BoCom) and Bank of China (BoC), reported narrowing net interest margin (NIM) ) when they released their results late last month.

Besides Bank of China, all four of the top five banks, including Industrial and Commercial Bank of China Ltd (ICBC), the world’s largest commercial lender by assets, saw their NIMs fall.

For the full year, BoC’s NIM is expected to fall to 1.71% from 1.76% at the end of June, while AgBank’s is expected to fall to 2.06% from 2.02% and the CCB at 2.08% vs. 2.09%, according to Refinitiv data based on analyst forecasts.

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“Going forward, the banking industry will face pressure from narrowing net interest margin,” BoC Chairman Liu Jin said at a post-earnings conference last week.

“FULFILLING RESPONSIBILITY”

The lower NIM will weigh on profitability, said Nicholas Zhu, banking analyst at Moody’s. The profitability of China’s big four banks – measured by return on assets – will stabilize at just below 1% over the next 12 to 18 months, he said.

The prospect of lower margins and lower profitability, however, should not deter some of the largest state-owned banks from heeding authorities’ call for increased lending to support the slowing economy.

“Our loan rate of return will drop slightly, but we will continue to carry the responsibility of a large public bank,” said the BoC’s Liu. “(We will) strengthen support for the real economy, maintain steady loan growth, to help stabilize the economy.”

CCB Chairman Zhang Jinliang said the bank’s loan performance could decline in the second half of this year, but added that the bank would continue to follow the government’s directive to lower borrowing costs for small businesses.

And to keep the NIM “at a reasonable level,” the bank will emphasize cost control on deposits, Zhang said. (Reporting by Ziyi Tang, Engen Tham and Xie Yu; Editing by Sumeet Chatterjee and Jacqueline Wong)

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