BOFIT Viikkokatsaus / BOFIT Weekly 2017/37

China's four largest banks recently released their financial reports for the first half of this year. The total profits of these banks increased by 3 % y-o-y to 510 billion yuan (70 billion euros). Compared to last year, however, their headline profitability indicators generally continued to weaken and their margins shrank. The large banks noted, however, that their profitability levels have stabilised. The average lending rate of banks fell by about 0.3 percentage points from a year earlier to a level of 3.9–4.2 %. Average rates fell for both short-term loans of less than a year and longer term loans. People's Bank of China figures show lending rates in the banking sector overall have risen slightly.

All banks claimed to be devoting heightened attention to risk management. They had raised reserves to deal with nonperforming loans (NPLs), even if banks reported that their NPL ratios relative to the overall loan stock was still at low levels (1.5–2.5 %). The bulk of nonperforming loans were held by companies involved in extractive industries, manufacturing or retail. Banks are widely seen as reluctant to declare a loan nonperforming. In addition, banks report that 3–4 % of their current loans are likely to become NPLs at some point. The share of such loans declined slightly.

Among the large banks, only ICBC mentioned banking challenges. It noted that financial sector risks were becoming increasingly complex, which complicated banks' efforts to manage risk exposure. With the ending of regulated interest rates, competitive pressure has forced banks to accept smaller margins. Competition has also stiffened with the appearance of online peer-to-peer credit providers.

The situation of small and mid-sized banks differs from that of large banks. When large banks suck up large amounts of the deposit business, small banks are forced to seek out assets on money markets. This limit them mostly to short-maturity lending activities. Interbank market rates have risen this year, which has made it more expensive to resort to the interbank market for funds. Interest rates also face upward pressure if China moves ahead with measures to bring the debt problem under control. Indeed, financing-associated risk alone was enough for the international credit ratings agency Moody's to last week lower its credit rating of Bank of Communications, China's fifth largest bank.