China’s largest state-owned banks have warned that profit margins will remain under pressure in the second half of the year, as policymakers continue to cut interest rates in a bid to stimulate the slowing economy.
Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), and Bank of China (BOC) all reported resilient first-half earnings this week but acknowledged that the outlook for the remainder of the year is less certain. Executives cited narrowing net interest margins a key measure of profitability as the main concern.
“The margin pressure is very real,” said an executive at one of the banks. “With lending rates being guided lower and deposit costs remaining high, banks will face a tougher environment in the coming months.”
China’s central bank has cut key policy rates several times this year in an effort to boost lending, support property developers, and stabilise consumer demand. While these moves are aimed at reviving growth, they also squeeze banks’ profitability by reducing the spread between what they earn on loans and what they pay on deposits.
The warnings underscore the delicate balance Beijing faces: supporting the broader economy without undermining the financial strength of its major lenders. China’s big banks, which dominate the domestic financial system, are also under pressure to extend more credit to struggling sectors, including property and small businesses.
Despite the challenges, the four giants all posted modest profit growth in the first half, aided by cost controls and steady loan demand in infrastructure and manufacturing. Still, analysts expect earnings growth to slow in the second half as rate cuts deepen and non-performing loan risks rise.
“Chinese banks are entering a period of prolonged margin compression,” said one Hong Kong-based banking analyst. “While they remain well-capitalised, their role as policy tools means profitability will take a back seat to economic stabilisation.”
Shares in China’s major banks were little changed on the news, though investors remain cautious about the sector’s medium-term outlook.
As the second half unfolds, the performance of China’s banking giants will be closely watched as a bellwether of both financial stability and the effectiveness of Beijing’s economic stimulus efforts.