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Four of China’s biggest banks post shrinking margins in Q3

Four of China’s largest listed lenders posted shrinking margins in the third quarter, as renewed turmoil in the property markets, which are grappling with a debt crisis, led to cuts in mortgage rates.

The squeeze in margins, a key gauge of profitability, comes as state-owned banks were asked to lower interest rates this year on existing mortgages to help revive the real estate industry, in a bid to bolster a sputtering economy.

Friday’s releases of third-quarter earnings showed falling net interest rate margins for Industrial and Commercial Bank of China Ltd (ICBC), Agricultural Bank of China Ltd (AgBank) and Bank of Communications Co Ltd (BoCom).

The previous day, China Construction Bank Corp (CCB) also posted a sliding figure.

The trend looks set to continue, analysts said.

“We expect the sector’s net interest margins to narrow further in 2024, as the impact from this year’s loan prime rate and mortgage rate reductions kick in,” said Vivian Xue, financial institutions director at ratings agency Fitch.

However, Xue added, “Further reductions in deposit rates and reserve requirement ratios may offset some of the margin pressure.”

The lenders’ net profit figures were mixed.

CCB and AgBank posted third-quarter profit growth on the year, while BoCom and ICBC saw a decline and flat profit growth compared to the year earlier period.

Ratios of non-performing loans (NPL) held mostly steady, with CCB, ICBC and AgBank posting no increase at the end of the third quarter from the previous one.

BoCom posted a slight fall in the ratio, to 1.32% at the end of September, from 1.35% at the end of June.

Analysts said one concern for lenders could be exposure to local government financing vehicles (LGFV), which have recently battled increasing difficulties in servicing their debt.

“LGFV exposure or extended loan extensions could lock up bank capital, which may impact the availability of capital to finance other sectors and reduce the system’s credit efficiency,” said Elaine Xu, another financial institutions director at Fitch Ratings.

“Lower interest rates associated with LGFV loans will also weigh on bank profitability, if the banks are not adequately compensated for the credit risks.”

China faces a daunting task in trying to revive growth after a brief post-COVID bounce in the wake of persistent weakness in the crucial property industry, a faltering currency and weak global demand for its manufactured goods.

Source: Reuters (Reporting by Ziyi Tang and Engen Tham; Editing by Clarence Fernandez)

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