According to recent analysis by Nikkei, the long-term crisis in the Chinese real estate market has led to a decrease in loan interest rates. Last year, among the 58 listed banks in China, 81% had a net interest margin below the profit warning line, raising concerns about the stability of the banking industry.
The net interest margin is calculated as (total interest income – total interest expenses) divided by total interest-bearing assets. The higher the net interest margin, the stronger the bank’s profitability and stability.
A report cited by Nikkei Asia evaluated the financial performance in 2024 of 58 commercial banks listed in mainland China and Hong Kong. The results showed that 54 of these banks (approximately 93%) experienced a year-on-year decrease in their net interest margin.
The banking industry association uses standards like net interest margin to assess the robustness of banks and sets 1.8% as the warning line, which is the profit threshold. If the net interest margin falls below this warning line, the overall assessment of the bank is penalized. Among the 58 listed banks analyzed by Nikkei, 47 (81%) had a net interest margin below 1.8%. This is a significant increase from the 6 banks, or 10%, before the 2019 COVID outbreak.
As a result of the pandemic and the bursting of the Chinese real estate bubble, the stagnant borrowing demand from businesses and households has led to a decrease in loan interest rates, causing a sharp increase in the number of banks approaching the warning line in terms of net interest margin.
As of the end of 2024, according to data from China’s National Financial Supervisory Administration, the average net interest margin for the banking industry, including small and medium-sized banks that are not listed, was 1.52%. This figure decreased by 0.17 percentage points year-on-year, reaching a historic low.
China’s economy continues to be affected by insufficient domestic demand. Gloomy job prospects and the impact of US tariffs have dampened consumer and business confidence. In an effort to stimulate consumption, Chinese banks comprehensively lowered deposit rates on May 20th, potentially further narrowing the profit margins of the banking industry.
Financial risks in China include loans to small and medium-sized enterprises. To support cash flow, the government has instructed banks to reduce lending rates for these enterprises. Bankers have begun expressing concerns about credit risks. Pan Huafu, Vice President of Hangzhou Bank, said during a financial briefing, “What we are most concerned about now is the credit risk of small and medium-sized enterprises, and this concern is not unfounded.”
According to Shinichi Seki, a senior researcher at the Japan Research Institute quoted by Nikkei, “The risk of borrowers is not reflected in interest rates, so potential non-performing loans may be expanding.” Based on financial data from listed companies, the expected rate of potential non-performing loans by the end of 2024 is 7.8%, with a significant portion of the risk stemming from real estate.
According to official statistics from the Chinese government, the non-performing loan ratio for commercial banks has remained stable at 1.5%. However, analysts believe that China’s bank asset evaluation practices are not strict, so official statistical data may not accurately reflect the actual situation.
The profitability of banks also affects the salaries of top bank executives. According to data from Choice and banking financial reports in 2024, among the 42 A-share listed banks, 33 banks saw a year-on-year decrease in total compensation for management, accounting for 78.5%. Longest drop was at Changsha Bank, with executive compensation dropping to 2.485 million yuan in 2024, compared to 14.111 million yuan in 2023, representing a decrease of about 82.4%.
China’s economic challenges have led to many small banks “disappearing” through acquisitions by larger banks or dissolution. In June of last year, Liaoning Rural Commercial Bank obtained approval to absorb and merge 36 rural small and medium-sized bank institutions. Recently, several Chinese banks have issued announcements about absorbing and merging rural banks. For example, Shunde Rural Commercial Bank plans to absorb and merge multiple institutions, including Shenzhen Longhua Xinhua Rural Bank, and convert them into branch offices.
For a long time, these small banks have faced management issues and accumulated a large number of non-performing loans. Many small banks have lent to real estate developers and local governments, getting entangled in the Chinese real estate crisis. It has been disclosed that for some small banks, 40% of their balance sheets consist of non-performing loans.