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China Construction Bank, the country’s second largest by assets, has warned that its profit margin will stay under pressure this year as concerns mount about the health of the country’s $56tn banking system.
The lender is the first state bank in China to report its second-quarter results. Five of the country’s biggest banks are expected to file earnings in the coming days.
Beijing has tried to balance its desire to stimulate the economy — by reducing borrowing costs — with the need to preserve the stability of China’s banking system.
Lenders this week held the five-year loan prime rate, which underpins mortgage rates, while the one-year rate was cut by 10 basis points rather than an anticipated 15 basis points.
First-half net profit at CCB rose 3.36 per cent year on year to Rmb167bn ($23bn) by the end of June. This is slower than the 5.4 per cent growth seen in the first half of 2022. The net interest margin, a key profitability gauge, stood at 1.79 per cent at the end of June, down from 1.83 per cent at the end of the first quarter and 2.02 per cent at the end of 2022.
Cuts to the loan prime rate have put sector-wide pressure on banks’ profit margins, said Sheng Liurong, chief financial officer at CCB.
“The deterioration of [the net interest margin] will be slower in the second half, as the central bank sounded out support for profitability,” said Sheng, referring to a recent People’s Bank of China report in which the central bank called for lenders to make a “reasonable profit”.
“But the margin will stay under pressure as [the loan prime rate] keeps lowering down and the central bank guides for lower rates on outstanding mortgages.
“The decline in [the loan prime rate] will put some pressure on bank’s net interest margin. But according our preliminary stress test, the impact will be roughly offset by the decline in deposit interest rates.”
A rush to pre-pay mortgages, another pressure point in profitability for the bank, peaked in April at CCB, according to the lender.
Tian Guoli, chair of CCB, downplayed concerns about the bank’s exposure to the property market.
“The market might have thought CCB is falling victim to the property market turbulence, as we relied heavily on mortgages and other property loan business, but the situation is quite the opposite,” Tian told reporters and analysts at an earnings briefing in Hong Kong on Thursday.
“We changed the focus of our property business into the rental housing sector six years ago, and lowered the proportion of loans lent directly to the developers,” he added. “This now fits well with the nation’s policy.”
Another risk for the banking sector is exposure to China’s indebted local governments. Banks could be hit if there are large-scale debt swaps and loan restructuring.
“Debt swaps are actually credit-positive for banks, as the borrowers’ credibility profiling is enhanced and the debt becomes obligations of higher provincial governments,” said Nicholas Zhu, banking analyst with Moody’s Investors Service.
“But if there’s new loan expectation . . . along with the debt swaps, that could be credit-negative because some of the local projects might not be commercially sustainable deals for banks.”
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