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A key profitability indicator at China’s biggest lenders has fallen to its lowest levels on record as a slowing economy and an official push to boost credit weigh on the country’s banking sector.
China’s six largest banks by assets have all posted their lowest-ever net interest margins — the difference between what a bank pays on its deposits and earns on its loans — in recent days, according to an analysis by the Financial Times.
The average margin across the six state-run lenders, including Bank of China and Industrial and Commercial Bank of China, the world’s biggest by assets, was 1.48 per cent at the end of last year, compared with 1.6 per cent the previous year. The last time it was above 2 per cent was in 2021.
The decline reflects growing pressure on China’s state-run banks as authorities struggle to stimulate an economy hit by a prolonged property slump and weak consumer confidence.
“Before 2022 you had a pretty normal net interest margin decline for an economy that’s starting to slow,” said Jason Bedford, a former UBS banks analyst. But the latest contraction has been driven by government cuts to mortgage rates, a jump in term deposits by savers and repricing of loans to small and medium-sized businesses, he added.
These policies have led banks to earn less on loans relative to what they pay savers.
China’s banks, which included the world’s four largest by assets as of the end of 2023, according to S&P Capital IQ, have been badly affected by Beijing’s response to the country’s economic slowdown.
The government has cut interest rates, with the one-year loan prime rate, a benchmark for household and corporate loans, at 3.1 per cent, down from 3.35 per cent in September.
Authorities trimmed mortgage rates in September as part of a stimulus package that also targeted the stock market and have sought to boost consumer lending at a time when demand for credit has soured and the threat of deflation has mounted.
Over the weekend, four of the six banks said they would raise $72bn, with the finance ministry making a rare direct investment amid concerns over profitability.
“I don’t regard the current recapitalisation of the big six banks as having anything to do with capital adequacy,” said Bedford. “It has everything to do with credit stimulus — they’re going to take that $72bn and lever it.”
Zhang Hui, Bank of China vice-chair, said in an earnings briefing last week that the bank would prioritise management of its net interest margin.
Yao Mingde, senior executive vice-president at Industrial and Commercial Bank of China, said the bank would avoid engaging in price wars, including pushing down interest rates to attract borrowers.
Bank of China’s net interest margin was 1.4 per cent at the end of 2024, while Industrial and Commercial Bank of China’s was 1.42 per cent. Bank of Communications had the lowest margin of the six banks, with 1.27 per cent.
Nicholas Zhu, vice-president and senior credit officer at Moody’s, said Beijing’s capital injection would help address “weak profitability” at the banks, which he said were affected by narrowing net interest margins.
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