Analysts said a prolonged property sector slowdown, greater expenses, and a worsening global macro outlook could weaken China’s top banks’ revenue and margins, clouding growth expectations for the world’s second-largest economy.
Five of the nation’s top state-owned banks presented annual results last week, revealing some of their issues.
If property asset quality deteriorates or the economic recovery stalls, banks’ capital buffers might be affected. They may also lose stock price increases.
Nevertheless, the two largest banks, Industrial and Commercial Bank of China (601398. SS) and China Construction Bank Corp (601939. SS), reported revenue declines and slower profit growth without provisions and impairment losses. Three reported a 2% or fewer sales increase.
After three years of tight COVID-19 rules that hampered commerce and domestic demand, China’s economy began to revive. However, analysts warned that the recovery is still fragile.
China’s banking sector’s first-quarter revenue is expected to slow. As a result, analysts and bank executives predict net interest margins (NIMs), a key indicator of bank profitability, to decrease slower in 2023, with the sharpest drop in the first quarter.
Citigroup analysts, including Judy Zhang, noted that Chinese banks face unfavorable pricing dynamics due to regulators’ window direction to frontload lending, which increased credit availability.
Analysts observed that banks’ new-loan yield was hampered by weak credit demand and excessive pricing rivalry.
China’s first two months saw higher bank lending than planned. Nevertheless, loans to the policy-driven infrastructure sector, with some prominent banks giving rates below 2% to state-owned enterprises, drove the performance, according to several bankers who declined to be identified.
They claimed lower lending rates than deposit rates pressure lenders’ NIMs.
“Smaller banks will suffer more,” said ING Greater China head economist Iris Pang. “Competition caused this.”
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