context: Multiple interest rate cuts were implemented over the last two years to stimulate demand and encourage homebuying. Moreover, to achieve the economic transition, the PRC is moving away from extensive growth led by heavy capital investment in real estate and infrastructure, which created significant revenues for banks. Interest income is the largest source of revenue for commercial banks and their stability is critical for the long term real economy. Now, there is weaker loan demand as the focus moves to capital-light and also riskier industries, such as tech.
Interest margins have further contracted, hampering commercial bank revenues, reports Economic Observer. 42 listed banks saw total operating revenue drop by 2 percent y-o-y in H1 2024. Commercial bank net interest margins fell to 1.54 percent in Q2 2024, a historic low, reveals data from the National Financial Regulatory Administration.
Banks are implementing measures to combat continuing downward pressure on interest margins in the short term, but the real problem to address in the long term is the shortage of good quality assets needed to restructure bank balance sheets to stabilise future profitability.
Zhongtai Securities believes
- revenue drop among the big four state-owned banks is largely driven by
- measures to reduce excess capital circulating in the economy
- decreasing operations scale
- for city and rural commercial banks
- decreasing investment returns
- decreasing income from changes in fair value adjustments
Joint-stock banks are experiencing the sharpest revenue drops, with some turning negative; they are being pushed from both sides by competition from state-owned and regional banks.
The ratio of net interest income to non-interest income will decrease over the long term; the former constitutes roughly 70 percent of bank operating revenues in the PRC.
Net interest margin is the lifeline of bank operations, stresses Liu Cheng 刘成 China CITIC Bank governor. Improving quality and allocation of bank liabilities, alongside effectively balancing risk and return on bank assets, is very important in the long term.
Guosen Securities suggests three main reasons for slow growth in net interest income
- net interest margin continued decline
- risks exposed in several sectors
- fewer interest generating assets
A greater decrease in interest income than the decrease in interest cost is driving compressed net interest margins, argues Guosen Securities. Deposit rate cuts are not big enough to offset cuts in the LPR (loan prime rate) and existing mortgage rates. A 23 basis point overall net interest margin drop in H1 2024 is case in point.
Deposit sizes and abilities to gain deposit is the focus for the future, emphasises Zhou Qiang 周强 Ping’An Bank board secretary.
Improving balance sheet management is key to stabilising net interest margins, echoes Peng Jiawen 彭家文 China Merchants Banks deputy governor.