• China's largest state-owned banks are likely to see their record low profit margins decline even further as Beijing's broader stimulus package comes into play, analysts say.
• "We expect net interest margins to see a small contraction in the fourth quarter and a larger decline in first quarter of 2025," Karen Wu, an analyst for CreditSights, told CNBC.
• That prediction aligned with an annual forecast by analysts from Morningstar. They see NIM for state-owned banks contracting by 15-25 basis points in 2024.

China's largest state-owned banks are likely to see their record low profit margins decline even further as Beijing's broader stimulus package comes into play, analysts say.

The net interest margins (NIM), a key proxy of bank profitability, at China's "Big 4" lenders — Industrial and Commercial Bank of China (ICBC), China Construction Bank, Bank of China, Agricultural Bank of China — fell by an average of around 20 basis points in the first nine months of 2024 from a year ago, CreditSights analysts said in a report.

ICBC, the world's largest lender by asset, was the only major lender among the Big 4 that reported a flat NIM in the third quarter compared to the previous quarter, at 1.43%. Still, that was 18 basis points lower from the beginning of this year.

Among its smaller rivals, Bank of China and China Construction Bank's profit margins came in at 1.41% and 1.52%, respectively, dropping from 1.44% and 1.54% in the previous quarter.

In an economic slowdown, China's $60.6 trillion banking industry has grappled with weakening profitability under the weight of lower mortgage rates and ailing credit demand.

At the end of June, overall commercial bank margins dropped to 1.54%, a record low, according to official data from the national financial regulatory administration. That's far below the 1.8% threshold that regulators see as necessary to maintain reasonable profitability.

Since late September, Beijing has ramped up monetary stimulus measures, pressing larger banks to provide cheaper and quicker lending to alleviate a lengthy property crisis and sprawling local government debt.

The major lenders await a recapitalization package from Beijing to help replenish capital and strengthen their ability to support recovery in the economy.

"We expect NIM to see a small contraction in the fourth quarter and a larger decline in first quarter of 2025," Karen Wu, an analyst from CreditSights, told CNBC.

That prediction aligned with an annual forecast by analysts from Morningstar. They see NIM for state-owned banks contracting by 15-25 basis points in 2024, and "mid- to- high single-digit basis points" next year.

Falling rates

In recent months, the People's Bank of China had delivered a flurry of monetary easing measures, including a 20 basis point cut to the 7-day reverse repurchase rate and a 25 basis point reduction in the 1-year and 5-year loan prime rates (LPR).

The central bank also slashed the loan rates on existing mortgages, while lowering the amount of cash that banks need to hold as reserves.

These cuts prompted banks to lower rates on deposits, with hopes of easing their funding costs and cushion the hit on already record low margins, said Kenny Lim, China banking analyst at UOB Kay Hian.

Most banks, however, expect the squeeze on NIM to be "neutral" in the long run, according to their earnings reports last week. That's because "the effect of the mortgage rate cuts and LPR cuts on NIM will be mitigated by reductions in the [reserve requirement ratio] and deposit rates," said Vivian Xue, director of APAC Banks at Fitch Rating.

However, it takes less time for banks to lower rates on loans, compared with deposits, which can only be repriced lower upon maturity, Lim said, reiterating near-term pressure on bank profit margins.

Soft loan demand

Lackluster credit demand has not shown signs of recovery, analysts said, as households and businesses remain cautious with spending.

China's aggregate financing, a broad measure of credit, showed a year-on-year decline of 12.6% in the first nine months, with new RMB-denominated loans in September alone falling 22.2%.

"With credit growth still in contraction, it remains too soon to declare a turnaround," Lynn Song, chief economist for Greater China at ING Bank, said in a note.

Chinese authorities need to do more to spur the "initial credit impulse," which is still missing, Jason Hsu, founder and chief investment officer of Rayliant Global Advisors, told CNBC's Pro last month. "There is cheap credit available, but people aren't ready to borrow."

Any recovery in lending could be "very incremental" in the next six months, he added.

Recapitalization in focus

China had planned to inject additional capital into six of its major commercial banks, a top financial regulatory official said in September, without giving details on the size and timeline. Bloomberg later reported that the recapitalization could be up to 1 trillion yuan ($142 billion).

Any major fiscal stimulus is expected to be approved by authorities at the standing committee of the National People's Congress, underway this week. Earlier this week, People's Bank of China Governor Pan Gongsheng said that the central bank planned to maintain supportive monetary policy.

The recapitalization "needs to happen for Chinese banks to survive the lower net interest margin," said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis. Otherwise these banks would not be able to "intermediate any stimulus that may come."

The move, if implemented, would be the first time since the global financial crisis in 2008 when Beijing injected capital into its big banks.

A capital injection is likely to boost investor confidence by providing downside support to credit growth, Iris Tan, senior equity analyst at Morningstar said in a note.