Chinese banks’ Q2 earnings subdued as balance sheet growth decelerates

But NIM and asset quality pressures are improving.

Chinese banks delivered muted earnings growth in Q2 2024 due to a slowdown in balance sheet growth, but interest margins and asset quality pressures are easing.

Balance sheet growth slowed to a 7.3% year-on-year (YoY) growth in Q2, from a 9.1% YoY growth in Q1, according to a report by UOB Kay Hian.

Total assets of large state-owned and joint-stock banks also grew at a slower pace, at 7.9% and 3.7%, respectively during the quarter.

Net profit remained almost unchanged, growing 0.4% YoY to RMB585.1b in Q2.

The banks’ net interest margin (NIM) is flat at 1.54% in Q2 on the back of lower loan yield due to the loan prime rate (LPR) cut and lukewarm credit demand. The NIMs of state-owned banks narrowed 1 basis point (bp) in Q2 compared to Q1, to 1.45%. Those of joint-stock banks expanded 1bp to 1.63%.

Asset quality is “benign”, with the non-performing loan (NPL) balance declining y 0.8% in Q2 compared to Q1. NPL ratio improved 3bp to 1.56% in Q2 compared to the previous quarter, and 6bp compared to Q2 2023.

Given the modest improvement in asset quality, UOBKH expects lower credit costs or a 16bp decline for Q2. This will support banks’ bottom line amidst subdued revenue growth, said UOBKH analyst Kenny Lim Yong Hui.

Looking forward, Lim expects the recent LPR cut and deposit rate cuts to have a net positive impact of 1 to 3 bps on banks’ NIMs.

“That said, we see room for an additional LPR cut after the first Fed interest rate cut in September. Additionally, we also foresee a 50bp reserve requirement ratio (RRR) cut in H2 2024 to fulfill the additional liquidity demand from the increased government bond issuance,” Lim said.