Some Chinese banks consider buying more bonds to ease pressure on margins

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Some of China’s biggest banks are planning to invest more in domestic bonds this year, hoping that the recent rally in short-term market interest rates will help ease the continued pressure on their net interest margins.

Although the six largest Chinese lenders increased their bond investments in 2020, four of them still reported their lowest net interest margins since listing because they lent more but at lower interest rates. lower to help restart the economy affected by the pandemic. The NIM of Bank of China Ltd. slipped to 1.85%, the lowest among the quartet. It was followed by 2.15% at Industrial & Commercial Bank of China Ltd., 2.19% at China Construction Bank Corp. and 2.20% at Agricultural Bank of China Ltd.

Meanwhile, the NIM of Postal Savings Bank of China Co. Ltd. fell to 2.42%, the lowest in four years, and the margin of Bank of Communications Co. Ltd. fell to a two-year low of 1.57%.

“Market interest rates have gradually increased, which is a great advantage for our net interest margin,” said Jinliang Zhang, chairman of the Postal Savings Bank, in a conference call on March 30, after reporting a 5.4% year-over-year increase in 2020 net income. “The net interest margin for the full year may still face downward pressure this year, but I think the pressure is easing compared to last year. “

The Postal Savings Bank’s bond portfolio grew only 0.5% in 2020, the lowest among the big banks. It was eclipsed by larger peers, such as ICBC and CCB, whose debt portfolio grew 17.4% and 14.0%, respectively.

ICBC chairman Lin Liao told another conference on March 26 that increasing bond investments could help lower financing costs for his clients.

Bond yield up

As the Chinese economy recovers from the pandemic faster than most other countries, and fears of default by government-linked issuers have eased, the benchmark government bond yield to 10 years has also recovered. The 10-year yield stood at 3.20% as of March 29, down from its recent low of around 3.00% in April 2020, according to Trading Economics.

Short-term domestic interest rates have increased in recent months. Shanghai’s overnight interbank rate, or so-called Shibor, rose to 1.825% as of March 30, from 0.899% at the start of 2021, according to the China Foreign Exchange Trade System & Nation Interbank Funding Center. One-year Shibor also pushed higher to 3.081% from 2.993% during the same period.

While Chinese banks charge some borrowers interest rates that are lower than their credit risk, falling loan yields have limited banks’ net interest margins. Lenders are urged to charge more affordable interest rates for vulnerable borrowers while allowing some of them to defer repayment of principal and interest until the end of 2021. The Agricultural Bank of China, for example, reported a 13bp drop in average loan yields in 2020.

Interest rates on loans to small businesses posted larger declines last year. The China Construction Bank said its average rate on so-called inclusive loans fell 64 basis points, while the Bank of Communications said the rate fell 96 basis points.

While the Chinese government has asked lenders to increase their small business loans by at least an additional 30% this year, analysts said earlier that they expected continued pressure on loan yields, and therefore on the margins. Meanwhile, China’s benchmark interest rate, the lending prime rate, is unlikely to rebound, as the central bank said it would maintain monetary policy accommodating enough to allow the economy as a whole as well. only vulnerable borrowers to survive.

That said, analysts are expecting a slight recovery in Chinese bank profits this year, mainly aided by further loan growth amid an economic recovery this year.

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