Profitability dismantling of listed banks: net interest margins continued to decline, and non-interest income came under pressure

Text/Tsinghua Financial Review, Qin Ting

Recently, a number of listed banks have announced their 2023 report cards, judging from the annual reports that have been released so far, the net profit of many banks has maintained growth, but the ROE has generally declined, and the decline in net interest margin is still one of the biggest challenges to the current profitability. In the future business development, one of the main challenges faced by commercial banks is to balance functionality and profit-making, and commercial banks need to find a balance between serving the real economy and maintaining their own financial sustainability.

With the release of the 2023 annual reports of listed banks, the operating results of listed banks have surfaced. From the perspective of operating performance, the net profit of most listed banks has maintained growth, but the ROE has generally declined, and the decline in net interest margin is still one of the biggest adjustments to the current profitability.

According to the data of listed banks that have published their annual reports, most of them have achieved net profit growth in 2023. The net profit of 5 banks exceeded 100 billion yuan, including 4 large banks and 1 joint-stock bank, ICBC still ranked first with 364 billion yuan, and China Merchants Bank was also the leader among joint-stock banks, reaching 146.6 billion yuan, and the net profit exceeded that of the two large state-owned banks, the Bank of Communications and the Postal Savings Bank.

From the perspective of growth, most of the listed banks have achieved net profit growth, but there is also a serious differentiation. For example, Bank of Hangzhou grew by more than 20 percent, Bank of Jiangyin and Changshu grew by more than 15 percent, Industrial Bank saw its net profit fall by 15 percent, China Everbright Bank by 9 percent, and Bank of Zhengzhou by more than 20 percent.

In terms of return on net assets, 11 of the 24 listed banks that released data exceeded 10%, and individual banks were lower, such as Everbright Bank, Minsheng Bank and Bank of Zhengzhou, all of which were below 8%. Compared to 2022, most banks have seen a decline in ROE. For example, Industrial Bank fell by 2.78 percentage points, and China Everbright Bank fell by 1.35 percentage points. Bank of Hangzhou performed better, rising by 1.32 percentage points.

Interest income is the main source of profitability for banks, but in recent years, banks' net interest margins have continued to narrow. According to the 2023 Main Regulatory Indicators of Commercial Banks (Quarterly) released by the State Administration of Financial Supervision and Administration, as of the end of 2023, the net interest margin of important indicators of commercial banks fell to 1.69%, falling below the 1.7% mark for the first time.

Regulatory data shows that the net interest margin of commercial banks at the end of 2022 was 1.9%, and the net interest margin began to decline from the first quarter of last year, and the net interest margin in the four quarters of 2023 was 1.74%, 1.74%, 1.73% and 1.69% respectively. It has broken through the threshold of 1.8% of the agreed net interest margin of the self-regulatory mechanism in the Implementation Measures for Qualified Prudential Assessment (2023 Revision).

Judging from the listed banks that have released data, only 7 have a net interest margin of more than 2%, except for Bank of Qingdao, all of which have decreased year-on-year. Ruifeng Bank decreased by 0.48 percentage points, Ping An Bank decreased by 0.37 percentage points, and China Construction Bank decreased by 0.32 percentage points.

In terms of non-interest income, Industrial and Commercial Bank of China, Bank of China, China Construction Bank, China Merchants Bank and Agricultural Bank of China exceeded 100 billion yuan, but compared with 2022, the general year-on-year decline, such as Industrial and Commercial Bank of China decreased by 16%, China Construction Bank fell by 15%, and Agricultural Bank of China fell by nearly 9%.

Specifically, the pressure on consignment businesses such as funds and wealth management is more prominent. For example, Ping An Bank will achieve agency personal finance income of 948 million yuan in 2023, a year-on-year decrease of 5.7%. In 2023, China Merchants Bank will achieve an agency wealth management income of 5.424 billion yuan, a year-on-year decrease of 18.37%, an agency fund income of 5.179 billion yuan, a year-on-year decrease of 21.52%, and an agency trust plan income of 3.206 billion yuan, a year-on-year decrease of 19.43%.

Peng Jiawen, vice president and head of finance of China Merchants Bank, said at the annual report press conference that the banking industry faced greater pressure in terms of fees and commission income last year. There are three main influencing factors:

"On the one hand, the slowdown or decrease in business volume growth has brought about a decline in revenue, such as the decline in the total custody of equity products by 4.55%, which has led to a significant decline in related business revenue and dragged down the overall revenue. On the other hand, last year's capital market fluctuations caused the income of the entire equity product to decline, so we compressed the equity products with relatively high rates in the structure of the agency fund, and also shifted the non-cash products with relatively high rates to the cash products with relatively lower rates in the wealth management products, and the change in the overall product structure also led to a decline in income. In addition, the impact of a series of policies such as fee reductions and concessions, insurance and fund rate reforms have also affected the overall fee income. ”

Dong Ximiao, chief researcher of Zhaolian and part-time researcher of the Institute of Financial Research of Fudan University, also pointed out that since last year, affected by changes in the financial market, investors' risk appetite has declined, fund stock prices have fluctuated greatly, and wealth management products have also been unstable.

From the perspective of cost-to-income ratio, among the listed banks that have published data, 11 will have a cost-to-income ratio of less than 30% in 2023, with ICBC ranking first with 27%, with better cost control, while PSBC is as high as 65%. Compared to 2022, the cost-to-income ratio of most listed banks has increased. For example, the Bank of Zhengzhou rose by 4 percentage points and the Postal Savings Bank increased by 3.4 percentage points.

How to deal with the decline in net interest margin?

In fact, the PBOC has long been concerned about the decline in net interest margin, and discussed the phenomenon of declining net profit growth and net interest margin decline of mainland commercial banks at this stage in the first column of the "Report on the Implementation of China's Monetary Policy in the Second Quarter of 2023", emphasizing that "commercial banks need to maintain reasonable profits and net interest margins to maintain sound operations and prevent financial risks, which is also conducive to enhancing the sustainability of commercial banks in supporting the real economy".

Declining spreads affect profits in the first place. CICC estimates that the net profit of commercial banks in 2023 will increase by 3.2% year-on-year. Among them, the net profit of large state-owned banks, joint-stock banks, urban commercial banks, and rural commercial banks in 2023 will increase by 1.8%, -3.7%, 14.8%, and 14.8% year-on-year respectively.

Affected by this, the return on assets of commercial banks in 2023 will fall by 5bp year-on-year to 0.70%, and the return on capital will decline by 40bp year-on-year to 8.93%.

The PBOC's column stresses the need to "allow banks to maintain their own sound operations in a reasonable way", which gives a reasonable guidance - different institutions should adjust their net interest margin levels according to their own operating conditions, potential customer group structure, business development needs and other factors, so as to obtain the impetus to cope with potential risks and sustainably serve the development of the real economy.

On February 1, Changshu Bank said in an institutional survey that in recent years, the bank has optimized the structure of the loan side by means of downward, small, credit and bias, so that the price of the loan side has decreased less and slowly. Looking forward to 2024, the price of the loan side is still in a downward channel, and the interest rate spread is expected to remain relatively stable in 2024 mainly by increasing the proportion of high-interest loans, optimizing the loan structure, and improving the deposit interest payment rate through the reduction of the price of the deposit side and the optimization of the structure.

One of the main challenges faced by commercial banks in the future business development is to balance functionality and profitability. Commercial banks need to find a balance between serving the real economy and maintaining their own financial sustainability. On the one hand, due to the reduction of the policy rate, the interest rate on the asset side of banks has fallen, while the deposit interest rate on the liability side is relatively difficult to fall, resulting in a thinner interest rate spread. On the other hand, in order to serve the national strategy, commercial banks have made concessions to the real economy, so that interest rate spreads have also thinned to a certain extent. Among them, many small and medium-sized banks will face greater financial pressure. Therefore, commercial banks need to find a balance between the two to ensure that they do not neglect the other.

Editor丨Qin Ting, Lan Yinfan

Preliminary trial丨Xu Lanying

Final Review丨Zhang Wei