Net interest margin to strain China Construction Bank’s profitability

Lower provisions could help offset earnings pressures.

Slower loan growth will help China Construction Bank maintain its capital base, although its net interest margin will continue to strain profitability.

The Chinese megabank reported a 1.3% year-on-year net profit drop during the first half of 2024. Despite this, its Tier 1 capital ratio rose to 14.92% in H1 2024, from just 14.04% in end-2023– even without external capital replenishment.

This coincided with moderating loan growth and persistent pressure on net interest margin (NIM).

“We expect tighter NIM to continue to constrain profitability amidst interest rate cuts and the government's push for banks to lower their lending rates to support the economy,” S&P analysts Yiran Zhong and Ming Tan said in the bulletin, “Bulletin: China Construction Bank Has Capital Buffer To Withstand Squeeze on Profitability.”

NIM was 1.54% for the first six months of 2024, down from 1.7% in 2023. Annaulised return on average assets also declined by 8 basis points (bps) to 0.84% over the same period.

“Tepid demand for retail loans caused a further shift in CCB's loan mix toward corporate sectors. A lower cost of deposits partly offset pressure on asset yields,” Zhong and Tan said.

Zhong and Tan said that CCB's risk management is sufficiently prudent to protect its asset quality. 

“With this, lower provisions from broadly stable asset quality could help alleviate earnings pressure,” they said.