Lower margins and profits
The economic outlook of China, the world’s second-largest economy, has been affected by the recent surge of COVID-19 cases, the regulatory crackdown on some sectors, and the ongoing trade tensions with the US. This has also impacted the performance of Chinese joint-stock banks (JSBs), which are commercial banks that are partly owned by the public. According to a report by CreditSights, a credit research firm, JSBs have experienced lower margins, profits, and loan growth in the first half of 2023 compared to the same period last year.
Net interest margins (NIMs), which measure the difference between the interest income and the interest expense of a bank, have contracted by 20-30 basis points year-on-year for most JSBs, except for China CITIC Bank (CINDBK), which had a smaller decline of 14 basis points. NIMs are a key indicator of a bank’s profitability and efficiency. The lower NIMs were mainly due to the falling interest rates, which were driven by the government’s accommodative monetary policy and the pressure to offer lower-cost loans to small and medium-sized enterprises (SMEs).
Operating income and net profits also declined for JSBs in the first half of 2023. All five banks monitored by CreditSights saw single-digit drops in operating income, while Shanghai Pudong Development Bank (SHANPU) and Industrial Bank (INDUBK) reported decreases in net profits as well. The other three banks, China Merchants Bank (CHINAM), CINDBK, and China Everbright Bank (CHEVBK), managed to increase their net profits due to lower provisions for bad loans. However, CreditSights noted that the profit growth prospects for JSBs remain challenging in the near term.
Modest loan growth and stable asset quality
Loan growth was modest for JSBs in the first half of 2023, ranging from 4-5% year-to-date for most banks, except for SHANPU, which had a lower growth of 1.6%. Loan growth slowed down in the second quarter, as the demand for credit weakened amid the economic slowdown. Loan-deposit ratios, which measure how much a bank lends out of its deposits, generally improved for JSBs, except for INDUBK, which still had a ratio above 100%. A lower loan-deposit ratio indicates that a bank has more liquidity and less risk.
Asset quality remained stable for JSBs in the first half of 2023, with flat to lower non-performing loan (NPL) ratios, special mention loan ratios, and overdue ratios. These ratios reflect how much of a bank’s loans are potentially or actually in default. The stable asset quality was partly due to the government’s support measures for SMEs and individuals affected by the pandemic, such as loan forbearance and interest relief. However, CreditSights warned that these measures could mask the true extent of credit risks and lead to delayed recognition of NPLs.
Outlook and recommendations
CreditSights expects JSBs to face further margin pressure and subdued bond trading activities in the second half of 2023, as the economic outlook remains uncertain and the regulatory environment becomes tighter. The firm also anticipates that JSBs will continue to focus on supporting SMEs and strategic sectors, such as green finance and digitalization. CreditSights maintains a negative outlook on JSBs’ credit ratings, as it believes that their financial profiles will deteriorate in the medium term.
CreditSights recommends investors to be selective when investing in JSBs’ bonds, as there are significant differences among them in terms of size, profitability, asset quality, capitalization, and funding. The firm favors CHINAM and CINDBK over SHANPU and INDUBK, as it considers them to have stronger franchises, better earnings resilience, lower credit risks, higher capital buffers, and more diversified funding sources.
