(Yicai) Nov. 20 -- Net interest margins at Chinese lenders have stopped declining in the third quarter, but their non-performing loan balances and ratios continued to increase.

Chinese commercial banks’ net interest margin stood at 1.42 percent at the end of the third quarter, unchanged from the end of the second quarter, according to the latest data from the National Financial Regulatory Administration.

The core reason for the stabilization of the net interest margin is the adjustments in the liability-side interest rates, said Dong Ximiao, deputy director of the Shanghai Institute for Finance and Development. The drop in deposit rates in May largely offset the impact of the loan prime rate cut, he added.

Another factor is that the funds released after the Chinese central bank lowered the reverse requirement ratio and interest rates helped banks save costs, temporarily alleviating the downward pressure on their interest margin, Dong noted. Meanwhile, regulatory authorities are addressing vicious competition, guiding lenders to optimize their pricing capabilities and promoting a steady decline in liability costs.

The balance of non-performing loans at Chinese commercial banks surged by CNY88.3 billion (USD12.4 billion) to CNY3.5 trillion (USD491.8 billion) as of Sept. 30 from June 30, according to NFRA data. Their non-performing loan ratio widened to 1.52 percent from 1.49 percent in the period.

In the third quarter, commercial banks’ non-performing loan balance and ratio both showed a slight increase, with the provision coverage ratio declining to 207.15 percent from 211.97 percent. This indicates that risks in certain sectors continue to emerge in the current economic environment, as there is still pressure on the asset quality rebound.

The increases in the non-performing loan balance and ratio are mainly due to two factors, according to Dong. First, the risks associated with retail loans continued to emerge, with personal consumption loans, business loans, and credit card overdrafts accounting for a great proportion of the non-performing retail loans.

Second, the risks in the real estate sector persisted, remaining a hotspot for non-performing loans, particularly with an uptick in the non-performing ratio of real estate development loans.

Future Predictions

Strict regulations on banks’ pricing behavior will continue to have an impact, Wang Yifeng, an analyst at Everbright Securities, said about the future trend of net interest margin.

The lagging effects of the deposit rate adjustments made in May will likely continue to be released, he noted, adding that it is expected that the overall net interest margin will remain flat throughout the year.

Insufficient effective credit demand, the replacement of local government debts’ declining asset yields, and the repricing of loans next year will continue to exert pressure on lenders’ net interest margin, Dong believes. The short-term stabilization does not change the long-term downward trend, he pointed out.

Regarding the future of non-performing loans, Dong said that throughout the second half of the year, the focus on non-performing loan disposal is expected to remain on personal business, with efforts to address consumption loans, credit card debts, and business loans maintaining the momentum from the first half of the year.

Meanwhile, sustained attention should be placed on real estate loans, as well as on export-related industries and enterprises affected by tariff policies, Dong noted.

Banking Industry Polarization

Against the backdrop of insufficient demand and cutthroat competition, the structural differentiation within the banking industry continues to intensify.

As of Sept. 30, the total asset value of China’s large state-owned banks jumped 10 percent from a year earlier, more than doubling the 4.7 percent growth rate of joint-stock banks in the same period, according to data from the NFRA.

Moreover, the total assets of large state-owned banks accounted for 43.9 percent of the overall figures for financial institutions in the banking sector as of Sept. 30, up from 2.7 percent from a year earlier, the NFRA data also showed.

This means that the survival space for joint-stock banks and small- and medium-sized banks is being squeezed. In this context, experts are calling for intensified efforts to address and regulate cutthroat competition within the banking sector.

Editor: Futura Costaglione