China's largest state-owned banks are expected to struggle with thinner margins later this year and into 2025, according to analysts, after these lenders this week reported profit declines amid Beijing's call to extend a lifeline to the troubled property sector and support the economy.

The Industrial and Commercial Bank of China, the world's biggest bank by assets, on Friday reported a net profit of 170.5 billion yuan (US$24 billion) for the six months ended June 30, down 1.8 per cent compared with the previous year.

The bank's net interest margin (NIM), a key gauge of a lender's profitability, narrowed to 1.43 per cent from 1.72 per cent last year. Meanwhile, its non-performing loans (NPL) ratio - an indicator of a bank's asset quality and credit risks - slipped to 1.35 per cent from 1.36 per cent.

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"In the second half of the year, bank profit margin NIM will be under further pressure if the loan prime rates (LPRs) drop again," said Li Ying, head of financial institutions ratings at S&P Global (China) Ratings.

At a time when the country faces unprecedented challenges, the performance of these state-owned enterprises show their importance to serve, according to a prominent Communist Party journal, as "the lifeline of the national economy".

China Construction Bank is the country's second-largest lender. Photo: Shutterstock alt=China Construction Bank is the country's second-largest lender. Photo: Shutterstock>

"We expect Chinese banks' NIM in 2024 to be from 20 to 25 basis points lower than in 2023, but the degree of NIM drop in the second half of the year will be much more moderate, as NIM is already at a low level," S&P's Li said.

China Construction Bank, the country's second-largest lender, saw its net profit drop to 164.3 billion yuan, down 1.8 per cent from the same period last year.

The lender's NIM shrank to 1.54 per cent, compared to 1.79 per cent a year ago. Its NPL ratio fell to 1.35 per cent from 1.37 per cent last year.

The Agricultural Bank of China, meanwhile, was the only state-owned banking giant to buck the trend, reporting a 2 per cent year-on-year increase in net profit to 135.9 billion yuan in the first half of 2024.

Nonetheless, its NIM slid to 1.45 per cent from 1.66 per cent a year ago. Its NPL ratio also narrowed to 1.32 per cent from 1.35 per cent last year.

The facade of the Agricultural Bank of China's headquarters in Beijing. Photo: AFP alt=The facade of the Agricultural Bank of China's headquarters in Beijing. Photo: AFP>

The Bank of China on Thursday posted a net profit of 118.6 billion yuan for the first half of 2024, down 1.24 per cent year on year.

The Beijing-headquartered bank saw its NIM narrow to 1.44 per cent from 1.67 per cent a year ago, while its NPL ratio also declined to 1.24 per cent from 1.28 per cent.

Smaller peer Bank of Communications posted a net profit of 45.3 billion yuan for the first half of the year, down 1.63 per cent from a year earlier.

The Shanghai-headquartered bank saw its NIM narrow to 1.29 per cent from 1.31 per cent last year, while its NPL ratio fell to 1.32 per cent from 1.35 per cent in the same period.

The Postal Savings Bank of China (PSBC) posted a first-half net profit of 48.8 billion yuan, down 1.4 per cent from a year ago.

The Beijing-based bank's NIM narrowed to 1.91 per cent from 2.08 per cent a year earlier. Unlike its peers, PSBC's NPL ratio, inched up 0.84 per cent from 0.81 per cent in the same period last year.

People walk past a branch of the Bank of Communications in Hong Kong. Photo: Reuters alt=People walk past a branch of the Bank of Communications in Hong Kong. Photo: Reuters>

After unexpectedly slashing the LPRs in July to bolster loan growth and support the housing market, Beijing is reportedly considering a scheme that would enable homeowners to refinance as much as US$5.4 trillion worth of existing mortgages, according to a Bloomberg report on Friday.

Even if such a move was implemented, it would only have a moderate impact on banks' NIM, according to analysts.

"The benefit to homeowners of this round of mortgage backbook repricing and the adverse impact to banking NIM, will be less than last September's mortgage backbook repricing," said Michael Chang, head of Asia financials at CGS International.

"This is because the difference between the repriced mortgage rate and the mortgage rates that the homeowners are paying, pre-repricing, is less now than it was back in September 2023," Chang said. He pointed out that this round of potential loan adjustment would result in a less than 5-basis- point impact on the banks' NIM.

In terms of asset quality, Chinese banks are likely going to see stabilising NPL ratios, as policymakers give these lenders sufficient leeway in determining what qualifies as bad loans, according to S&P's Li.

"The 16 Measures to Support Real Estate allows banks not to classify property development loans in forbearance as bad debts," she said. "Loans to LGFVs [local government financing vehicles] which went through restructuring may not be classified as bad debts either."

"As a result, such policies allow banks to report only a moderate increase in NPL ratio even under severe external stress," she added.

Meanwhile, the challenges in second-half NIM performance is expected to come from rising term deposit mix and weaker retail loan growth, according to Iris Tan, a senior equity analyst at Morningstar.

"Banks have increased their corporate real estate lending after the large-scale property rescue package," Tan said. "Given that property developer loan exposure remains low, and these new lending is restricted to those quality projects in the whitelist, we do not expect significant risks to banks' asset quality at the current stage."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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