Net Interest Margins of A-Share Listed Banks Experience Decline in Third Quarter
The net interest margin, a key indicator for measuring the profitability of commercial banks, has attracted significant attention from the capital market. The third-quarter reports of all A-share listed banks have been disclosed, and it is evident that many banks, including major state-owned banks, experienced a decline in net interest margins compared to the previous quarter.
The trend of net interest margin is closely related to the performance growth of listed banks. Although there was downward pressure on the net interest margins of several commercial banks in the third quarter, it is unrealistic to expect a continuous narrowing of net interest margins in the future. Various factors are expected to support the “bottoming” of net interest margins for commercial banks.
Firstly, there is limited room for further decline in net interest margins. While the net interest margin data for the banking industry in the third quarter of this year has not been disclosed by regulatory authorities, the net interest margin for commercial banks in the second quarter of 2023 was 1.74%, which was nearly identical to the first quarter. This figure represents the lowest level in history for which data is available and has been consistently below the full score level (1.80%) defined in the “Implementation Measures for Qualified Prudential Assessment (2023 Revised Edition)” for two consecutive quarters. Overall, there is little space remaining for commercial banks to further narrow their net interest margins. The third quarter reports of listed banks also reveal a narrowing year-on-year and month-on-month decline in net interest margins for some banks, with some even showing an upward trend.
Secondly, regulatory authorities have emphasized the need for commercial banks to maintain a reasonable level of net interest margin. In recent years, factors such as interest rate liberalization have caused net interest margins in China’s commercial banks to continuously shrink, resulting in slower profit growth. However, commercial banks face capital constraints when providing loans to the real economy, and dealing with risks also requires capital. Ensuring a reasonable level of net interest margin not only helps commercial banks enhance their ability to serve the real economy but also facilitates capital replenishment and financing capabilities. In turn, this promotes the steady development of the macroeconomy. The central bank has previously stated that “commercial banks need to maintain reasonable profits and net interest margins in order to sustain sound operations and prevent financial risks. This will also help strengthen the sustainability of commercial banks in supporting the real economy.”
Thirdly, as China’s macroeconomy continues to recover, the demand for financing is expected to steadily increase, and the scope for further lowering loan interest rates is anticipated to narrow. Sheng Laiyun, deputy director of the National Bureau of Statistics, recently stated that “the economy will continue to recover in the fourth quarter and maintain an overall upward trend.” Additionally, various fiscal policies have been implemented to improve efficiency and promote economic stability and improvement. The effects of recent reductions in existing mortgage interest rates and the Loan Prime Rate have already been partially reflected in the third quarter reports of commercial banks. As the impact of these policies gradually takes effect and the economy stabilizes and improves, commercial banks’ return on assets is expected to experience some marginal improvement.
Fourthly, since the beginning of this year, interest rates on commercial bank deposits have been reduced in several rounds. This reduction not only helps prevent fund arbitrage in the financial system but also alleviates the downward pressure on net interest margins.
To conclude, based on the macroeconomic trends in China, the dynamics in commercial bank asset and liability management, and statements from regulatory authorities, it is expected that the net interest margin of commercial banks will reach a “bottom” in the future. However, it is worth noting that due to differences in resource endowments and operating capabilities among commercial banks, their respective net interest margin trends may not entirely align with industry trends and may even deviate. Therefore, commercial banks should focus on strengthening differentiated operating capabilities, enhancing refined management levels, and leveraging financial technology to maintain a reasonable level of net interest margin.
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