China’s state-owned banks face thinner margins amid Beijing’s call to support economy

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At a time when the country faces unprecedented challenges, these state-owned banking giants show their importance as the economy’s lifeline

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An advertisement displaying the interest rate for loans at a branch of the Industrial and Commercial Bank of China in Chengdu, capital of southwestern Sichuan province. Photo: Bloomberg

Yuke Xiein Beijing

Published: 1:00pm, 1 Sep 2024

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.

“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

“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.