(Yicai) Aug. 18 -- Chinese commercial banks’ net interest margin rose quarter on quarter in the second quarter for the first time in four years, as lower funding costs helped ease a prolonged squeeze on margins despite weak credit demand and lingering asset-quality pressures.

The net interest margin edged up 0.01 percentage points from the first quarter to 1.41 percent, while total assets rose 7.5 percent from a year earlier, slowing from 8.9 percent growth in the first quarter, according to data released by the National Financial Regulatory Administration.

A slower decline in lending rates and lower funding costs jointly supported the rebound in the net interest margin, the gap between banks’ interest income and funding costs. The increase suggests a prolonged squeeze on profitability may be easing as lower deposit costs offset pressure from low loan yields.

Commercial banks’ net interest margins are expected to remain broadly stable this year, though pressure on asset yields from weak credit demand and lower reinvestment returns could cause margins to edge down in the second half, analysts said.

Funding Costs Support Margin Stabilization

Analysts attributed much of the improvement to lower funding costs as high-interest deposits mature and are repriced.

On the liability side, the repricing of existing high-interest deposits as they mature, together with efforts to control the cost of broader interbank liabilities, has effectively lowered banks’ funding rates and will continue to have an impact, said Wang Yifeng, chief financial industry analyst at Everbright Securities. But with limited room for further reductions in marginal funding costs, the pace of decline is expected to slow, he added.

On the asset side, regulators have shown a strong willingness to stabilize net interest margins, while industry self-regulatory mechanisms have taken the lead in setting lower limits on lending rates to curb excessive price competition, helping stabilize loan pricing.

Interest rates on newly issued loans remained low. In June, the one-year and over-five-year loan prime rates were 3 percent and 3.5 percent, respectively, both unchanged from a year earlier. The weighted average interest rate on newly issued loans was 3.1 percent, down 0.2 percentage points from a year earlier, the data showed.

The stabilization of commercial banks’ net interest margins mainly reflects lower funding costs resulting from the repricing of time deposits, which has allowed the decline in banks’ liability costs to catch up with the drop in yields on interest-bearing assets, said Wang Jian, chief financial sector analyst at Guosen Securities. He expects commercial banks’ net interest margins to remain stable throughout this year.

However, asset yields will remain under downward pressure because of factors including insufficient effective credit demand, the occasional use of low-interest bill financing to make up for weak loan demand, and falling reinvestment yields on existing bond assets, Wang Yifeng said. Overall, commercial banks’ net interest margins are expected to remain broadly stable or edge lower in the second half, he added.

Slower growth in bank assets reflects not only weak short-term credit demand but also a longer-term trend, according to Wang Jian. Commercial banks have faced sluggish credit demand since the beginning of this year, so the slight slowdown in industry asset growth is normal, he said.

Asset growth is unlikely to rebound significantly and will probably remain at the current level or even lower over the longer term, the analyst added.

Asset Quality Remains Broadly Stable

Meanwhile, banks’ asset quality remained broadly stable despite a slight rise in bad loans.

At the end of the second quarter, commercial banks had CNY241.5 trillion (USD35.82 trillion) of performing loans. Non-performing loans totaled CNY3.7 trillion (USD548.9 billion), up CNY52.3 billion (USD7.8 billion) from the end of the previous quarter, while the NPL ratio rose 0.01 percentage points to 1.52 percent, the data showed.

Asset-quality indicators deteriorated slightly at the margin, but the changes are not significant when viewed over a longer period, Guosen's Wang Jian said. A more important indicator for assessing bank asset quality is the NPL formation rate, he noted. The rate tracks how quickly performing loans turn sour, offering a more timely gauge of emerging credit stress than the headline NPL ratio, which can also be influenced by banks writing off or disposing of bad loans.

Based on data from listed banks, overall asset quality remains stable, with the NPL formation rate staying at around 0.7 percent for several consecutive years, Wang Jian said. But banks currently face a ratio of loan impairment losses to NPL formation of below 100 percent, indicating insufficient provisioning for bad debts, he added.

The shortfall suggests banks have yet to fully absorb the cost of newly emerging bad loans, potentially putting more pressure on earnings.

With net interest margins stabilizing and revenue growth recovering, banks are therefore likely to prioritize increasing provisions to cope with future uncertainties rather than releasing profits, Wang Jian predicted. This may also explain why commercial banks’ overall net profit growth has edged down despite the stabilization in net interest margins, he added.

Chinese commercial banks reported nearly CNY1.24 trillion in net profit in the first half of this year, down 0.57 percent from a year earlier, according to the data.

Editor: Emmi Laine