Loan losses, margins squeeze China’s biggest banks
China’s major financial institutions face increasing challenges due to heightened provisions for loan losses and ongoing compression of their profit margins as they strive to bolster the world’s second largest economy. The lenders, spearheaded by Industrial & Commercial Bank of China Ltd., on Friday disclosed declining or subdued earnings for the first half of 2025, as they persistently extended new loans to China’s beleaguered consumers. Overall, the five largest banks allocated allowances for loan losses amounting to 3.51 trillion yuan, reflecting an increase of nearly 6 percent compared to the end of the previous year during the first half of the year.
Their financial situation is becoming increasingly pressured as they fulfill their obligations to stimulate the economy through low-interest lending and loan subsidies. The sector’s overall margin has experienced a further contraction, reaching a historic low of 1.42 percent as of June. This figure falls below the 1.8 percent threshold that is considered essential for sustaining reasonable profitability for more than two years. ICBC stated it “actively boosted consumption” as such loans rose by 10.2 per cent during the period. The company’s net income experienced a decline of 1.4 percent compared to the previous year, amounting to 168.1 billion yuan. The net interest margin, an essential indicator of profitability, decreased to 1.30 percent from 1.43 percent.
According to Francis Chan, a senior analyst at Bloomberg Intelligence, ICBC’s performance could indicate challenges in reversing earnings for the full year. The bank faces “various risks to revenue and limited room to reduce credit costs,” he noted in a report. Profit at competitors China Construction Bank Corp. and Bank of China Ltd. decreased by 1.4 percent and 0.9 percent, respectively. In contrast, net income at Agricultural Bank of China Ltd. increased by 2.7 percent, while Bank of Communications Co. reported a 1.6 percent rise. All entities indicated a contraction in margins compared to the previous year, while the ratios of non-performing loans decreased from the conclusion of 2024.
Official data released earlier this month indicated that the aggregate profits of the nation’s commercial banks experienced a contraction of 7.7 percent compared to the previous year, totaling 1.2 trillion yuan in the first half of the year. This represents the inaugural decrease since 2020, a year characterized by the pandemic’s disruption of factories and businesses. While the authorities have directed banks to reduce funding costs through a series of deposit rate cuts, we anticipate additional monetary easing as China confronts its economic challenges, which is expected to further diminish loan yields for lenders. Yao Mingde, Vice President of ICBC, indicated that he anticipates a continuation of the sector’s margin decline in the latter half of the year, albeit at a potentially slower pace. Regarding the bank’s outlook, “we’re confident that our net interest margin will see a marginal stabilization in the future,” he stated during a press conference.
