Chinese banks see improved earnings in Q3

Interest income and fee income declines narrowed.

Chinese banks reported improved earnings growth in the third quarter of 2024 on the back of narrower interest income and fee income declines as well as stronger trading gains.

Earnings growth was 0.74% year-on-year (YoY) for the Q3 period versus a flattish Q2, according to UOB Kay Hian, based on data from the National Financial Regulatory Administration (NAFR).

Amongst the lenders, state-owned banks (SOEs) outperformed joint-stock banks (JSBs) in terms of earnings growth UOBKH said.

Agricultural Bank of China (ABC) led the pack with a 5.9% YoY earnings growth.

Net interest margins (NIM) of Chinese banks fell 3 basis points (bp) to 1.51% on a quarterly basis. SOE banks recorded a 2bp NIM compression to 1.43%, whilst JSBs experienced a 1bp NIM drop to 1.63%.

Sluggish credit demand continues to weigh on the banks, leading to lower loan yields and an increase of low-yielding discount bills. This was offset by a deposit cost decline following the July 2024 deposit rate cut.

Most banks also reported smaller fee income declines in the third quarter, UOBKH said.

“We believe the waning impact of bancassurance and mutual fee rate cuts, and recent pick-up in equity market turnover amidst the policy turnaround could help reverse the fee income sluggishness in Q4 2024,” said UOBKH analyst Kenny Lim Yong Hui in a sector report on Greater China Banking.

Banks’ key revenue driver for the quarter was their other net interest income (NII), which surged 70% YoY on average. This was driven by investment gains from bond trading and foreign exchange gains.

Lim said that some banks may have sold a portion of their long-term government bonds in Q3 to help the People’s Bank of China (PBOC) in stabilising long-term treasury yields.

“Whilst this may boost trading gains, it could also negatively impact long-term NIM performance as banks will need to reinvest funds at lower yields given the falling interest rates,” Lim warned.