Chinese banks’ earnings decline narrow, but retail NPLs could be an issue

Earnings of 16 large banks are 0.5% lower than in H1 2023.

Lower impairment charges and strong trading income helped reduce Chinese banks’ earnings decline in Q2 2024.

The combined net profit of six state-owned banks (SOE) and 10 joint-stock banks in China is $135.28b (RM960b) for the first six months of 2024, 0.5% year-on-year lower than the same period in 2023, according to a report by UOB Kay Hian (UOBKH).

Negative revenue growth was seen in most national banks except the Agricultural Bank of China in H1, mainly due to net interest margin (NIM) compression and fee income compression. 

NIMs compressed 19 basis points on average in H1 compared to H1 2023, according to UOBKH analyst Kenny Lim Yong Hui.

“Most of the major banks saw mild sequential NIM compression in Q2 2024, largely within our expectation, thanks to lower funding cost as the function of previous deposit rate cuts and regulatory efforts to suspend the manual subsidies on corporate deposits. However, depressed asset yield and declining CASA ratio remained as key drags for the banks’ margin,” Lim said.

Fee income continued to be sluggish, shrinking by 12.4% on average for the major banks in Q2 compared to Q1.

SOE banks notably recorded a deeper fee decline of 10% YoY in Q2 compared to the same quarter in 2023. This was due to bancassurance and mutual fund fee rate cuts, weakened investor sentiment amidst volatile capital markets, and lower bank card fees, UOBKH said.

“Despite some recovery in wealth management product demand due to 
deposit outflow and plummeting treasury yield, it was insufficient to offset the fee decline from insurance sales against a tougher base,” Lim said.

Annualised non-performing loans (NPL) ratio fell 10 basis points on average on the back of asset quality in developer loans. However, Lim still raised concerns over the asset quality of banks; retail loan book asset quality.

“The rising trend of retail NPLs could be a key concern for banks, as it may limit their ability to further reduce credit costs in order to boost their profits,” Lim said.

The difference between credit cost and NPL formation ratio was 20-30 basis points for major banks in Q2.