Type to search

China Banks Face Profit Squeeze From Covid, Property Crisis

China’s top banks face narrowing margins as they’ve also been asked by Beijing to boost their lending to the country’s struggling economy

Chinese banks extended 719 billion yuan ($104 billion) in new yuan loans in April, less than a fifth of March’s tally and half of forecasts
"China's credit data came in well below estimates, reinforcing concerns on the sustainability of a post-Covid recovery," Zhou Hao, economist at Guotai Junan International, said. Photo: Reuters


China’s top banks are bracing for a squeeze on their profit margins as the world’s No2 economy continues to struggle with Covid and its ailing property sector lurches from crisis to crisis.

The banks, preparing to respond to Beijing’s call to boost lending to the real economy and debt-laden property sector, are set to see their profits come under pressure in the second half, bankers and analysts warned. 

Five of China’s biggest state-owned banks posted modest gains in profits in the second quarter. Four of the banks, except for Bank of China, however, reported falling net interest margins, a key gauge of bank profitability.  


Also on AF: Chips Banned by US in Big Demand from Chinese Researchers


The dour outlook for Chinese banks comes as the world’s second-largest economy narrowly avoided contracting in the second quarter as widespread Covid-19 lockdowns and the slumping property sector badly damaged consumer and business confidence.

With economic momentum cooling, Beijing has unveiled a string of interest rate cuts in the last few months and has been stepping up pressure on lenders with new instructions to grow loans.

Lower asset yields as a result of reduced benchmark interest rates and continuing competition for deposits, a key source of funding for Chinese banks, means interest margins of banks will see greater pressure, analysts said.

Banks have been asked by the Chinese government to support the country’s cash-strapped property sector, which accounts for nearly a quarter of gross domestic product.

“Now they are told to support because the sector is going to [need] help … and I think there is no worse time because interest rates are on the way down and net interest margin has narrowed … the banks have much less leeway,” said Alicia García Herrero, chief economist for Asia Pacific at Natixis.


Narrowing Net Interest Margin

Narrower net interest margins – how much banks earn in interest from loans compared to what they pay out in interest on deposits – will affect their profitability, leading to lower dividends for shareholders and weakening 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) – flagged narrowing net interest margin (NIM) when they reported their results late last month.

Aside from 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 a drop in their NIM. 

For the full year, NIM of BoC is expected to fall to 1.71% from 1.76% at end-June, while that of AgBank should ease to 2.06% from 2.02% and CCB to 2.08% from 2.09%, according to Refinitiv data based on analysts forecast.

“Looking forward, the banking industry will face pressure of narrowing net interest margin,” Liu Jin, chairman of BoC told a post-earnings conference last week.


Beijing Lending Boost Call

Lower NIM will strain profitability, said Nicholas Zhu, a banking analyst at Moody’s. China’s Big Four banks’ profitability – as measured by return on assets – will stabilise just below 1% over the next 12 to 18 months, he said.

The prospect of lower margins and profitability is, however, not expected to dissuade some of the top state-owned banks from heeding the call from authorities to boost lending to support the slowing economy.

“Our rate of return from loans will slightly fall but we will continue to fulfil the responsibility of a big state-owned bank,” said BoC’s Liu. “[We will] enhance support for the real economy, maintain steady growth in loans, to help stabilise the economy.”

President of CCB Zhang Jinliang said the bank’s loan yield could decline in the second half of this year, but added the bank would continue to follow the government’s directive to lower borrowing costs for smaller enterprises.

And to keep the NIM at “a reasonable level,” the bank will put an emphasis on controlling costs on deposits, Zhang said.


  • Reuters with additional editing by Sean O’Meara




Read more:

China Banks, Officials Resisting Beijing’s Property Rescue Call

Chinese Banks Brace For Massive Hit As Homebuyers Refuse To Pay Loans

China’s Central Bank Injects Banks With Cash in Small Doses



Sean O'Meara

Sean O'Meara is an Editor at Asia Financial. He has been a newspaper man for more than 30 years, working at local, regional and national titles in the UK as a writer, sub-editor, page designer and print editor. A football, cricket and rugby fan, he has a particular interest in sports finance.


AF China Bond