Good times may soon be over for China’s banks as interest margins are squeezed in the fourth quarter by rising competition for deposits
- Profit growth of Chinese banks for third quarter met expectation, still analysts worry a protracted war on deposit could bite into banks’ margin this year
- US-China trade war did little harm to banks’ loan quality, as non performing loan ratio improves for most banks
China’s state-owned banks, which survived the US-China trade war with their asset quality and profitability unscathed, may see their interest margins coming under pressure in the fourth quarter as competition intensifies for deposits.
The overall non-performing loans (NPL) ratio in China’s banking industry improved by between 1 and 2 basis points in the third quarter. This came at the expense of net interest margins (NIM), especially among the four largest state-run lenders – Industrial & Commercial Bank of China (ICBC), Bank of China, Agricultural Bank of China and China Construction Bank – which fell by about 1 basis point in the third quarter from the previous three months, according to government data.
“While management at Chinese banks are confident that their asset quality will continue to improve, the pressure on NIM will continue, as the competition for deposit will extend into the fourth quarter,” said CIMB International Securities’ banking analyst Terry Sun.
The squeeze on profitability underscores how China’s financial industry is grappling with survival after more than 12 months of a bruising trade war with the United States, amid slowing demand for loans and investments in the local economy’s slowest quarterly growth pace in decades.
The banks’ margins are squeezed by higher returns that they must pay to depositors to attract their funds – the banks’ cost – and the interest rate they can charge to lend money to borrowers.
The difference between the cost and the revenue, known as the interest rate spread, has been the biggest source of profitability for China’s state-owned banks, in an industry where the financial authorities keep a tight grip on the interest rates for deposits and loans.
