- China’s banks battle shrinking margins amid lending pressure
- Lenders called on to support China’s economic recovery
According to Bloomberg article published on April 28, 2023, China’s biggest lenders, including Industrial & Commercial Bank of China Ltd., eked out profit growth in the first quarter of 2023 as they wrestled with shrinking margins and the lingering economic impact of China’s exit from Covid zero.
Net income at ICBC rose 0.02% to 90.2 billion yuan ($13 billion) from the year-earlier period, according to an exchange filing on Friday. China Construction Bank Corp. posted a 0.3% gain, Bank of China Ltd. a 0.5% increase and Agricultural Bank of China Ltd. a 1.75% gain, according to separate filings. Profit at Bank of Communications Co. rose 5.6%.
The results come after most of China’s biggest banks warned of tough times ahead last month after reporting surprisingly upbeat earnings for 2022, many above analyst expectations. Profits last year were boosted as lenders pushed to extend more credit to help cushion the economy from a slowdown triggered by the nation’s strict pursuit of Covid zero.
The shrinking margins were due to the effects of prime rate reductions and the “continuously increasing proportion of time deposits,” ICBC said in a statement. Bocom cited similar factors, adding that the “constant transfer of profits” to the real economy and repricing on existing loans also had an impact.
Although it has been largely shielded from the global banking turmoil of recent months, China’s $55 trillion banking sector faces challenges of its own against the backdrop of a murky economic recovery. Many of its smaller regional banks are struggling, loaded with riskier debt and high exposure to ailing local government financing vehicles. The major state-owned banks are planning to raise additional capital with bond sales amid shaky global debt markets after the wipe-out of AT1 bonds issued by Credit Suisse Group AG.
Factors such as a potential loan prime rate cut this year and a government push for state lenders to lower borrowing cost for small businesses and home buyers could all pressure Chinese bank earnings in 2023.
“Beijing is pushing state lenders to lower borrowing costs for small businesses and home buyers,” Bloomberg Intelligence analyst Francis Chan wrote in a note before the earnings release. “The central bank might also trim the loan prime rate in 2Q.”
Here’s a summary of earnings compared with the previous year, and and the margin and bad loan ratio compared to the previous quarter:
Additionally, structural issues present a deeper-rooted challenge.
“The longer term structural challenges with the banks include searching for a new lending paradigm that’s consistent with the new economic growth paradigm,” said Nicholas Zhu, a banking analyst at Moody’s Investors Service, in an interview before the earnings report. “After three years of Covid, with contraction in the real estate market, China is looking for new engines for growth. Until those new engines are secured, many aspects of economic activities will have to be in search mode — including bank financing of those activities.”
Adding to the headaches around earnings is the fact that many Chinese consumers are opting to pay off their mortgages early. An index that tracks mortgage prepayments in China hit a record high earlier this month, CGS-CIMB analysts led by Michael Chang wrote in a note Tuesday. The prepayments, likely concentrated on mortgages issued during 2018 to early 2022 that had relatively high rates, will put additional pressure on banks’ net interest margins this year, Chang said.
While asset quality is likely to remain stable this year, net interest margins could shrink, according to a April 18 note from Moody’s analysts. One of China’s big four state lenders plans to reduce some personal and corporate deposit rates next week, Reuters reported Monday, citing a person familiar with the matter.
First quarter earnings at China’s banks tend to give a good indication of how the rest of the year will go for earnings although there’s some seasonality that typically makes it a stronger period than others, Zhu said. Still, because of China’s exit from Covid-zero at the end of December, the first quarter might be difficult to extrapolate much information from, he said.
Commercial banks’ profit growth has been slowing as falling interest rates squeeze margins and lenders set aside more provisions in anticipation of more bad loans, China’s banking regulator said in a statement Wednesday. While banks have also been lowering deposit rates, they need to balance profitability with the need to keep liabilities stable, the watchdog said.
