Bank presidents have laid their cards on the table

"At the recent 2024 mid-term performance meeting of China Construction Bank, President Zhang Yi stated that the bank strengthened cost control for key projects, with operating expenses in the first half of the year decreasing by 1.7% compared to the same period last year.

"Adhering to refined management, seeking value from management, and striving to 'squeeze water out of the dry towel' in the era of meager profits." President Liu Jianjun of PSBC stated at the performance meeting. PSBC meticulously managed costs in the first half of the year, reducing controllable costs by nearly 1.8 billion yuan.

As listed banks submit their papers for the mid-term reports, despite the seemingly substantial profits in the banking industry, many signs indicate that the challenges of narrowing net interest margins and slowing profit growth are facing bank presidents. The days of 'earning money lying down' are long gone.

What secrets about resident investments and consumption are hidden in the interim reports of the banking industry? How should bank presidents tighten their belts and manage finances carefully?

Significant Increase in Deposits Troubles Bank Presidents

In 2023, most listed banks maintained positive net profit growth against the backdrop of negative revenue growth. However, in the first half of this year, many banks 'stopped pretending and laid their cards on the table,' with several major banks experiencing negative growth in operating income and net profit.

China Merchants Bank, traditionally seen as the 'top student' in the banking industry, was no exception. The interim report shows that in the first half of the year, CMB's operating income was 172.945 billion yuan, a decrease of 3.09% year-on-year; net profit was 75.379 billion yuan, a decrease of 1.38% year-on-year.

During the performance meeting, an analyst sharply questioned that compared to state-owned major banks, CMB has a higher valuation premium due to its higher profit growth rate. Now that the profit growth rate is similar to that of state-owned major banks, or even lower than some major banks, how will they ensure profit growth in the future?

CMB President Wang Liang stated that overall, the negative growth in revenue and profit of commercial banks is a fundamental issue. CMB is no different from other mainstream banks.

Wang Liang emphasized that CMB will improve its profitability by enhancing asset quality and reducing risk costs, rather than simply increasing profits by reversing provisions or reducing provision coverage ratios.

Wang Jian, Chief Analyst of Financial Industry at Guosen Securities, pointed out that in a situation where net interest margins, fee income, and other indicators are converging, asset quality and provision calculation are still the primary reasons for the differences in net profit growth rates among different banks, followed by the speed of asset expansion. The provision calculation intensity of various types of banks has decreased, and some banks may gradually deplete their provision 'reserves.'

(Revenue and profit growth of the top 20 listed banks; classified into state-owned major banks, joint-stock banks, and city commercial banks)

Net interest margin represents the profitability of banks. Data from the China Banking and Insurance Regulatory Commission shows that at the end of the second quarter, the net interest margin of the banking industry was 1.54%, unchanged from the previous quarter. This level is at a historical low.

According to the author's statistics, among major banks, China Merchants Bank has a relatively good net interest margin, reaching 2.0%. Minsheng Bank is under pressure at 1.38%; among state-owned major banks, PSBC's net interest margin reached 1.91%, CCB was at 1.54%, while ABC, BOC, and ICBC were comparable, at 1.45% each 1.44% and 1.43%.

In recent years, in order to support the real economy and reduce fees, the Loan Prime Rate (LPR) has been lowered multiple times, leading to increased competition among banks for high-quality asset projects. On the other hand, the scale of bank deposits has increased significantly, showing a trend towards long-term and fixed-term deposits, resulting in high and sustained interest payment costs for banks.

Lowering deposit interest rates remains an important task for bank executives.

Wang Zhiheng, the President of Agricultural Bank of China, introduced that with the repricing of deposits, especially medium to long-term fixed-term deposits, the new deposit rates have significantly decreased as deposits mature this year, easing the pressure on deposit costs to some extent, and the deposit interest payment rate has decreased to a certain extent compared to the previous year.

In July of this year, policy rates and the LPR were lowered again. Correspondingly, state-owned banks also lowered deposit rates on July 25th. Wang Zhiheng stated that this basically offset the impact of the LPR reduction in July, which is beneficial for stabilizing the net interest margin level.

Li Yun, Vice President of China Construction Bank, stated at a performance meeting that the trend towards fixed-term deposits has continued, with the proportion of fixed-term deposits slightly increasing by the end of June. However, the trend of long-term fixed-term deposits has slowed down, with the proportion of new 3-year and above fixed-term deposits absorbed in the first half of the year decreasing by 4 percentage points compared to the previous year.

However, this may be related to the banks' proactive measures such as removing 3-year and 5-year large-denomination time deposits since April. Bank account managers mentioned that customers can directly deposit fixed-term deposits. However, after the state-owned banks led the way in lowering deposit rates, the annual interest rate for a five-year fixed-term deposit is only 1.8%, causing many investors to see it as unattractive.

"Now is the time to test the asset-liability management capabilities of commercial banks." Peng Jiawen, Vice President of China Merchants Bank, admitted that the impact of structural changes on net interest margins far exceeds the impact of pricing. Taking deposits as an example, the cost of liabilities has benefited from the rate cuts, but the proportion of demand deposits has decreased. This means that the significant decrease in the proportion of demand deposits has offset the cost reduction from the rate cuts. Therefore, China Merchants Bank insists on focusing on core deposits (excluding large-denomination time deposits, structured deposits, and other higher-cost deposits) as a key assessment point.

Liu Jin, Vice President of Bank of China, stated that strengthening the refined management of liabilities, strictly controlling the proportion of high-cost deposits, increasing the settlement of custody funds, and enhancing the diversity of liability structures.

Early Repayment Continues, Housing Loans Decrease by 300 Billion

Once, personal housing loans supported a significant portion of the banking industry's new credit issuance. However, despite the continuous issuance of personal housing loans, early repayments continue to surge. According to Wind statistics, the scale of personal housing loans at 15 major listed banks decreased by 308.324 billion yuan in the first half of the year.

Among them, Postal Savings Bank of China, China CITIC Bank, and Zhejiang Commercial Bank saw an increase in housing loan balances, with additions of 23.618 billion yuan, 18.637 billion yuan, and 17.451 billion yuan respectively. Industrial and Commercial Bank of China and Agricultural Bank of China saw larger decreases in balances, reducing by 123.092 billion yuan and 100.671 billion yuan respectively.

This is not due to banks being unwilling to support the development of mortgage loan business, but rather, while banks are issuing mortgage loans, residents' early repayment scale remains high

Agricultural Bank of China as an example, in the first half of the year, its personal housing loan disbursement was 309.6 billion yuan, but the balance still decreased. In the first half of the year, Industrial Bank's mortgage loan disbursement was 76.6 billion yuan, but the balance decreased by 10.7 billion yuan.

Beijing homebuyer Liu Bo told the author that after several LPR cuts, his mortgage loan interest rate dropped from 5% to 4.5%. However, stocks and funds both suffered significant losses, and even relatively stable bank wealth management products have recently experienced fluctuations, with yields dropping to around 1.5%. "Early repayment is also a form of wealth management." There are many homebuyers with such a mindset.

In the first half of the year, Minsheng Bank's mortgage loan balance decreased by 6.182 billion yuan. Zhang Jun Tong, the vice president of the bank, introduced that in the first half of the year, Minsheng Bank's mortgage loan disbursement decreased by 9.22% year-on-year. Although the amount of early repayment also decreased significantly, the total amount of early repayment still remained at a high level.

However, Zhang Jun Tong mentioned that in June, the monthly mortgage business has shown a situation where the disbursement volume exceeded the repayment volume, and the scale has begun to stabilize and rise.

Homebuyers are hoping for another adjustment in mortgage interest rates. Recently, there have been rumors in the market that a policy of "converting existing housing loans to mortgages" may be introduced. This news once triggered a sharp decline in bank stocks on August 30.

Wang Liang, the president of China Merchants Bank, responded at the performance meeting, stating that they have not yet received relevant opinions from regulatory authorities, nor have they consulted commercial banks. The policy has not been confirmed yet.

At the UBS Securities China A-share seminar held on September 2, Yan Mei Zhi, the head of UBS Greater China Financial Industry Research, believes that the current average interest rate for existing mortgages is 4.1%, while the average interest rate for new mortgage loans is 3.3%. In recent times, the mortgage rates in major cities have already dropped to the 2% range. With a significant difference in interest rates, consumers may have complaints, and the government also hopes to encourage consumption. Therefore, there is a possibility of a reduction in existing housing loans.

According to UBS calculations, if the interest rate for existing housing loans is reduced from 4.1% to 3.1%, with bank deposit rates unchanged, it will cause a negative impact of 11 basis points on bank interest margins, leading to a negative impact of over 10% on bank profits. Therefore, if the policy is implemented, deposit rates will also be lowered to hedge against this.

However, at the press conference on September 5, Zou Lan, director of the Monetary Policy Department of the People's Bank of China, mentioned that further downward adjustment of deposit and loan interest rates still faces certain constraints due to factors such as the speed of bank deposits flowing into wealth management products and the narrowing of net interest margins of banks.

In the view of market participants, the net interest margin of the banking industry is currently at a historical low, and policies need to consider the reasonable profit level of the banking industry to sustainably support the real economy.

Wang Liang also stated that if the policy of "converting existing housing loans to mortgages" is introduced, it will have a certain negative impact on the interest rates of existing mortgage loans in the banking industry. The macro-management department will conduct sufficient demonstration and research before implementation.

Retail loan delinquencies rise, but still good assets

China Merchants Bank's semi-annual report shows that the balance of retail loans in the first half of the year was 3.47 trillion yuan, accounting for 54.32% of total loans, a decrease of 0.39 percentage points from the end of the previous year. This is mainly due to the slowdown in consumption growth and the sluggish real estate market in the first half of the year, leading to a slight decline in the scale of credit card loans and personal housing loans The bank is actively promoting the growth of micro and consumer loan businesses.

Wang Jian from Guosen Securities also pointed out that the current demand for retail credit is still weak, and in the first half of 2024, listed banks mainly focused on new loans to corporate clients. In terms of the industry distribution of corporate loans, it is mainly in urban investment and construction, industry, wholesale and retail, with some new loans for real estate development as well. Looking at the changes in the existing structure, the proportion of personal housing loans has decreased in recent years, while the proportion of industrial wholesale, urban investment and construction loans has continued to rise.

At the same time, the non-performing loan ratios of retail loans, including mortgage loans, have all shown varying degrees of increase.

The author's statistics show that the scale of non-performing personal loans of 15 major banks increased by 74.179 billion yuan in the first half of the year. Among the 8 banks that disclosed non-performing mortgage loans, only PSBC saw a decrease in the scale of non-performing mortgage loans, while the other banks saw an increase. The 8 major banks collectively added 20.682 billion yuan in non-performing housing loans.

In the first half of the year, ICBC and CCB had a significant increase in non-performing mortgage loans, adding 9.275 billion yuan and 7.453 billion yuan respectively. Minsheng Bank, SPDB, and ICBC had higher non-performing rates for personal housing loans, at 0.83%, 0.75%, and 0.60% respectively.

At the mid-term performance meeting, the quality of retail loan assets and risk control became hot topics for analysts and the media to discuss with bank presidents.

"I now feel scared when I think back. If we had done more of those high-risk products last year, the situation this year might have been uncontrollable." Ji Guangheng, President of Ping An Bank, admitted at the performance meeting that Ping An reduced high-risk credit retail loans by around 150 billion yuan, which had a significant impact on revenue. The semi-annual report shows that Ping An Bank's revenue in the first half of the year decreased by 12.95% year-on-year.

Ji Guangheng stated that it was very painful to stop (high-risk business) last year, and when revenue declined rapidly, there were different opinions internally, but Ping An basically resisted the temptation.

Ping An Bank pointed out in the semi-annual report that due to factors such as continued concessions to the real economy, adjustment of asset structure, and reduction of fees in the banking and insurance channels, as well as the continued pressure on repayment ability of some individual customers, the bank still maintained a significant level of write-offs and provisions for retail assets, leading to a decrease in operating income and net profit of retail business year-on-year.

Wang Ying, Deputy President of CMB, said, "The entire industry will face severe challenges and pressure in (retail loan) risk management. We dare not relax at all and maintain a high level of awe." CMB predicts that the asset quality control of retail credit will still face challenges in the second half of the year and in the future. The non-performing rate, watch rate, and overdue rate of retail credit at CMB may slightly increase season by season, but the overall risk of retail credit is stable and controllable.

The banking industry once vigorously promoted "retail transformation". Currently, is retail credit still a good asset?

Zhong Desheng, Deputy President of CMB, stated that although there is a certain potential risk pressure in retail, from a comprehensive evaluation of quality, efficiency, and safety, retail loans are still the best type of asset Due to the highly diversified retail loans, sufficient collateral, and high-quality customer base, the actual losses are very small. "Therefore, our overall risk resistance and ability to withstand cycles are stronger."

In April of this year, China Construction Bank Chairman Zhang Jinliang proposed at the 2023 annual performance meeting that finance is a marathon and one must have the ability to withstand long cycles. He advocated abandoning the traditional mindset of "heroism based on scale and speed."

This statement has attracted attention in the market. For a long time, there has been a trend in the banking industry of "quantity compensating for price," that is, increasing the scale of credit issuance to offset the decline in loan prices. However, more and more bank presidents are realizing that this path is not sustainable.

Executives from Industrial Bank also stated that starting from the third quarter, the overall market's loan demand has been gradually shrinking, which is quite evident. Therefore, in the second half of the year, the focus of credit issuance is no longer on the quantity but on the quality. The emphasis of loan issuance is mainly on optimizing structure and strengthening pricing management, rather than deliberately pursuing scale growth.

Author: Xiao Wang, Source: Prism, Original Title: "Bank Presidents Show Their Cards"