(Yicai) Aug. 18 -- China’s banking sector showed healthier fundamentals in the second quarter, with both the amount and share of non-performing loans falling as lenders ramped up the disposal of bad assets and net interest margins stabilized as they fine-tuned lending and deposit rates.

Bad loans at banks stood at CNY3.4 trillion (USD473.4 billion) in the three months ended June 30, down CNY2.4 billion (USD330 million) from the previous quarter, while the bad loan ratio dipped 0.02 percentage point to 1.49 percent, according to figures released by the National Financial Regulatory Administration on Aug. 15. Banks had combined local and foreign currency assets of CNY467.3 trillion (USD64.4 trillion), up 7.9 percent from a year earlier, the data also showed.

This improvement was driven by the faster disposal of bad assets and stepped up new lending, which had a “dilution effect” on overall loan quality, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance.

In the first half, banks set aside new loan loss provisions of CNY1.1 trillion (USD153 billion), a year-on-year increase of CNY57.9 billion (USD8.1 billion), and they also disposed of CNY1.5 trillion of dud assets, CNY123.6 billion more than a year ago.

Capital buffers were also bolstered. The capital adequacy ratio had climbed 0.3 percentage point to 15.58 percent. Both the Tier 1 capital adequacy ratio and the core Tier 1 ratio rose, reflecting greater financial resilience.

Overall, there was an uptick in profitability and operating efficiency. Net interest margins, the difference between the amount of money a bank earns on loans and the amount it pays on deposits, held steady, dipping by an average 0.01 percentage point on the prior quarter to 1.42 percent.

The pressure on net interest margins has eased thanks to coordinated adjustments to both loan and deposit rates, said Wang Yifeng, chief financial analyst at Everbright Securities. Although new loan rates sank to a historic low in the quarter, early mortgage repayments and May’s cut in the benchmark loan prime rate resulted in lower deposit rates which helped offset the pressure.

“In May, there was a systematic lowering of the cap on deposit rates and nominal interest rates were adjusted, including by cutting demand deposit rates by 5 basis points,” Wang said. “This pushed funding costs down significantly, slowing down the narrowing of the interest spread.”

Looking ahead, policies are aimed at preventing interest rate margins from shrinking too fast and ensuring stability across the banking system so as to keep spreads steady, Wang said. This half, banks will most likely be discouraged from offering excessively low lending rates or overly high deposit rates. As a result, net interest margin should hold steady at around 1.4 percent this year, and the profitability and overall stability of operations will be further consolidated, he said.

Editor: Kim Taylor