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Lower interest rates and property woes weigh on Bank of China’s profits

Net interest margin fell, although at a lower decline than other Chinese megabanks.

Bank of China’s profits will dip over the next two years despite expanding lending to emerging sectors and ongoing caution in giving out real estate loans amidst ongoing Mainland China property woes.

Return on average assets (ROAA) is expected to decline to 0.65%-0.75% over 2024-2025, down from 0.8% in 2023 and 0.85% in 2022.

The primary cause is a reduced net interest margin (NIM) amidst lower interest rates. BOC’s NIM already fell to 1.59% in end-2023 from 1.75% in 2022.

This is the lowest decline amongst China’s largest banks, as BOC benefited from higher offshore rates.

BOC’s nonperforming loans (NPLs) plus special mention loans (SMLs) were 2.73% of the total loan book at end-2023, up slightly from 2.67% at end-2022. 

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“Bank of China operating performance is likely to be resilient over the next one to two years. The megabank's diversified portfolio and adequate risk management will help it withstand the effects of China's slowing growth, property market strains, and geopolitical tensions, in our view,” S&P Global Ratings said.

BOC is expected to continue its asset expansion by lending to green finance, small and micro enterprises, and emerging sectors that are expected to support China’s economic recovery.

In contrast, BOC is expected to remain cautious in underwriting property development loans despite the government's "white list" mechanism that encourages banks to lend to property projects.

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The NPL ratio for BOC's corporate loans to the mainland property sector fell to 5.51%, from 7.23% a year earlier. The bank's 89% provision for NPLs and SMLs should strengthen its cushion against losses from asset-quality strains, S&P said.

Mainland Chinese real estate loan exposure was limited, at less than 4.4% of the loan book at end-2023.

Overall, elevated asset expansion and profitability pressure could also erode BOC's capital buffer, S&P Global Ratings warned  in a non-ratings report on the bank.

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