Damo pointed out that although the decline in LPR may put pressure on loan interest income in the Chinese banking industry, at the same time, interest costs paid by banks to depositors are also decreasing, which will help ease the pressure on net interest spreads. Damo predicts that the banking industry will outperform the market in the next 12 months.
Morgan Stanley believes that China's banking industry is gradually shifting from its reliance on loan growth in the past to more rational competition and loan pricing strategies. This shift is expected to help stabilize the bank's net interest income (NIM) and may mitigate long-term risk. Damo predicts that in the next 12 months, the performance of the banking industry will surpass that of the large market.
On September 8, Richard Xu and three other Dama analysts released a report saying that most banks have shown that expectations for the growth of various types of loans have weakened, including total loan growth and SME loans. In this context, banks will pay more attention to the quality of loans rather than quantity, which may create a more rational competitive environment.
Key areas of focus for corporate loans remain policy-supported industries and industries with growing needs. Banks said they will prioritize support for strategic emerging industries, medium- and long-term manufacturing, technology, inclusive finance, and green finance.
Some banks have already outlined specific strategies: ICBC plans to deploy more loan resources ahead of time as loan yields decline; China CITIC Bank plans to pay more attention to industries at risk of overcapacity; SPD Bank has transferred more credit resources to enterprises, particularly infrastructure, utilities, manufacturing, and wholesale industries, and will continue to focus on these areas...
Net interest spread pressure may decrease in the second half of the year
Damo pointed out that although the decline in the loan market quoted interest rate (LPR) may reduce the interest income that banks receive from loans, at the same time, interest costs paid by banks to depositors are also decreasing, which helps mitigate the negative impact on NIM.
Furthermore, while the repricing of existing mortgages may increase pressure on NIM, most banks say they have yet to receive advice from policymakers on adjustments in this regard. This means that there are currently no policy requirements to force banks to lower interest rates on mortgages.
Banks also said they are confident they can further reduce deposit costs if the situation requires it, which may be achieved by providing lower deposit interest rates or attracting more low-cost capital to maintain or improve NIM.
Daima wrote:
On the debt side, many banks acknowledged that capital cost control was a key factor in NIM's relative stability in the second quarter of 2024. The impact of lower deposit interest rates is gradually showing, banks are actively attracting low-cost deposits, and we expect this to continue to support NIM.
In particular, China Construction Bank said that the July deposit interest rate cut may offset the 10 basis point reduction in the July 1-year and 5-year LPR, with limited impact on 2024. Meanwhile, most banks, including China Construction Bank, Postbank, China Merchants Bank, China CITIC Bank, and SPD Bank, said they will continue to move to more time deposits in the second quarter of 2024.
In terms of assets, many banks say loan yields are stabilizing due to more rational competition. Furthermore, banks have been actively adjusting their asset portfolios, including asset classes and terms, to offset declining loan yields.
China Merchants Bank said they have not received any instructions from regulators, but if such a policy is implemented, it is expected to have a negative impact on the bank.
The pressure on non-interest income is also expected to ease
Damo also believes that in the second half of this year, the downward pressure on non-interest income will also ease. For example, banks such as China Construction Bank have optimized their non-interest income structure through new businesses. China Merchants Bank implemented rate discounts to enhance customer service, while ICBC and others promoted the growth of non-interest income through businesses such as investment banking and asset management.
Retail AUM (Total Assets Managed by Retail Customers) of some banks is growing strongly, particularly Bank of Ningbo and Bank of Beijing, while City Bank has seen rapid growth in retail deposits. Despite the slowdown in the growth of bank deposits of state-owned enterprises, banks, as a whole, have addressed the challenges brought about by rate cuts through diversified strategies.
In terms of asset quality, although credit quality for SMEs and retail loans has declined in some banks, analysts are optimistic about the stability of banks' medium- to long-term credit costs. Banks are also taking steps to control long-term risk by increasing loan pricing and optimizing loan structures.
China Construction Bank, Agricultural Bank and Bank of China expressed confidence that they can maintain stable asset quality, while China CITIC Bank is confident that asset quality has improved.
Damo also pointed out that banks are also looking for other assets to obtain returns or liquidity, including increasing investment in bonds and allocating more assets to non-bank financial institutions. These measures are all conducive to the steady recovery of the banking industry.