Solving the "Interest Margin Anxiety" Year: The Banking Industry's High Ground Defensive Battle

In the recently concluded year of 2024, it seems that no bank could escape the "interest margin anxiety."

According to Wind data, in the first three quarters of 2024, the 42 listed banks in A-shares achieved interest income of 6.99 trillion yuan.

In terms of scale, the income still maintained a year-on-year growth of 1.07%; however, the growth rate has significantly declined, dropping by 7.71 percentage points compared to the same period last year.

Behind the evident fatigue in growth are the continuously pressured net interest margins, the pace of balance sheet expansion, and asset quality.

Although the banking industry has long called for a "light asset transformation," viewing intermediary business as the "second growth curve"; for listed banks where interest income still accounts for about 70%, any deterioration in indicators could deliver a "fatal blow" to fragile growth.

Looking back at 2024, banks generally displayed a defensive posture in their interest business:

On one hand, under the new economic situation, many banks have actively or passively slowed down their balance sheet expansion;

On the other hand, many banks have shown a certain conservative tendency in pricing style and asset-liability structure.

For example, in response to net interest margin pressure, banks previously had two strategies: controlling costs and raising yields; however, in recent years, more institutions have shown a heightened focus on quality and risk, shifting asset preferences from high-risk, high-yield to medium and low-risk.

Cost Side Defense Line

Currently, among various joint-stock banks, only China Merchants Bank and Ping An can maintain a net interest margin of over 1.9%.

Among the two, China Merchants Bank's "moat" has always been its leading deposit pricing ability.

In the first half of 2024, despite China Merchants Bank's yield on interest-earning assets being lower than that of Industrial Bank, Everbright Bank, and Shanghai Pudong Development Bank by 0.24, 0.23, and 0.11 percentage points respectively, its net interest margin was still higher by 0.14, 0.46, and 0.52 percentage points.

This is attributed to its significantly lower funding costs compared to its peers.

Wind data shows that during the same period, China Merchants Bank's funding cost rate was only 1.72%, making it the only joint-stock bank below 2%; this figure was 0.53 percentage points higher than the second-ranked Industrial Bank and Ping An.

China Merchants Bank's "deposit attraction tool" is its wealth management business, which has reached a certain scale, and its strong product-oriented mindset encourages more retail customers to choose it as their preferred investment account.

Even in the first half of 2024, when the equity market was weak, insurance funds were reducing fees, and intermediary business income was under pressure, the total number of retail customers and AUM (Assets Under Management) still maintained growth of 2.54% and 6.62% respectively compared to the beginning of the year.

Overall, China Merchants Bank's advantage in deposit pricing and structure comes from low-cost deposits under its wealth management business.

Among various types of deposits, the cost of demand deposits is lower than that of long-term deposits, and the cost for individuals is lower than that for enterprises.

In the first half of 2024, demand deposits accounted for 51.96% of total deposits at China Merchants Bank, making it the only national joint-stock bank with a demand deposit ratio exceeding 50%; the proportion of individual demand deposits reached 21.03%, second only to Agricultural Bank of China among national joint-stock banks, far exceeding other joint-stock banks.

Although the direction of wealth management has become a "battleground" for transformation among banks, from the perspective of retail deposit indicators, China Merchants Bank's "moat" remains quite solid in the short term Although the net interest margin is high, the proportion of interest income at China Merchants Bank ranks last among listed joint-stock banks.

This is not only due to its strong position in the non-interest income market but also because there is still significant room for improvement in its fund utilization rate.

According to Wind data, the loan-to-deposit ratio of China Merchants Bank in the first three quarters of 2024 is far below that of its peers, at only 77.39%; during the same period, the loan-to-deposit ratios of Everbright and Ping An are both above 90%, while those of SPDB, Industrial Bank, and Minsheng even exceed 100%.

China Merchants Bank's Vice President Peng Jiawen stated at the mid-term performance meeting that in the future, more attention will be paid to the structure of deposits and assets:

For example, in terms of major asset allocation, it is necessary to properly allocate investments, loans, and interbank assets; in terms of loan allocation, it will continue to enhance or increase the proportion of retail loans to improve overall returns.

In addition, several banks view controlling liability costs as a key measure to stabilize interest margins.

For instance, CITIC President Liu Cheng stated at the performance meeting that to cope with the narrowing net interest margin, the company focuses on reducing liability costs, and the management strategy has shifted to simultaneously strengthen both sides of assets and liabilities;

Industrial Bank is also managing liability costs by reducing high-cost deposits and enhancing the organizational capacity for low-cost settlement deposits.

Consensus on Risk Control

Unlike China Merchants Bank, which has consistently led in pricing, Ping An has shown an advantage in interest margins, mainly benefiting from a yield on interest-earning assets that is far higher than its peers.

In the first half of 2024, Ping An's yield on interest-earning assets reached 4.16%, ranking first among joint-stock banks; during the same period, banks like Industrial Bank, Everbright, and SPDB, which have higher loan pricing, all had yields below 3.85%.

Since 2016, Ping An has initiated a retail transformation, rapidly expanding personal loans over the years; credit card business, auto finance, and "New Yi Dai" have become models for various institutions to imitate.

However, under the "high risk, high return" model, Ping An's non-performing loan ratio once deteriorated.

For example, in 2023, although the non-performing loan ratio only increased by 0.01 percentage points year-on-year to 1.06%; the non-performing loan ratios for credit card receivables and consumer loans reached 2.77% and 1.23%, respectively, increasing by 0.09 percentage points and 0.15 percentage points year-on-year.

In 2023, after Ji Guangheng took over as president, he admitted that "the previously high interest margin was not due to low-cost liabilities but came from high rates on the asset side."

He pointed out that the high-interest margin and high-rate retail that had previously made a significant contribution to revenue are no longer suitable for the new situation.

Subsequently, Ping An proactively shifted to a defensive stance, temporarily abandoning high-yield retail businesses related to credit; at the same time, it increased assets such as mortgage loans and adjusted its customer base to ensure the safety of existing assets.

As of the end of the third quarter of 2024, Ping An's credit card non-performing loan ratio has dropped to 2.64%; at the same time, the consumption structure has optimized, with online consumption accounting for 5.5 percentage points more year-on-year, and the average daily balance of credit card revolving and installment payments accounting for 1.2 percentage points more year-on-year.

The trend of shifting from "high risk, high return" to medium-low risk is also reflected in other banks.

For example, Industrial Bank President Chen Xinjian stated at the performance meeting that it aims to shift from a combination of high-yield assets and high-cost liabilities to a combination of low-cost liabilities and high-yield assets, "to strengthen liabilities, optimize assets, and expand middle-income through quality service." As of the end of the first half of the year, the balances of green, technology, and inclusive enterprise loans at the bank increased by 13.13%, 9.25%, and 16.54% respectively compared to the end of the previous year, with growth rates all exceeding the overall growth rate of corporate loans.

CITIC Bank has also stated that it will optimize the loan structure and improve asset returns by increasing the proportion of loans, stabilizing the interest margin at a reasonable level.

The bank's vice president, Hu Gang, stated, "The company is highly concerned about retail business risks. In 2020, we noticed that the household leverage ratio reached 60%. In 2021, we realized that the downturn in the real estate market could put pressure on the quality of personal loan assets, and we have now strengthened risk prevention and control."

Incremental "Seeking Outside"

In an environment of continuously declining interest rates, many banks are optimizing their assets and liabilities, also "seeking outside" to explore overseas assets.

For example, China Merchants Bank President Wang Liang revealed at a performance meeting that in the next phase, the bank will focus on promoting international and overseas businesses to enhance revenue and profit proportions.

Previously, China Merchants Bank had established six overseas branches in Hong Kong, New York, Singapore, as well as three subsidiaries: China Merchants Yonglong Bank, China Merchants Bank International, and China Merchants Bank Europe.

"We are also learning from the experience of the Japanese banking industry," Wang Liang stated. "They have continuously promoted internationalization over the past few decades to reduce the impact of low, zero, or even negative interest rates on domestic business margins."

This idea has also been validated by the Bank of China, which has a large scale of overseas assets.

Due to the asynchronous domestic and international economic cycles, the Bank of China's high proportion of overseas assets has contributed considerable returns during the global interest rate hike cycle, hedging some of the pressure from the narrowing domestic net interest margin.

For example, since 2022, countries have generally compressed demand to cool down in the face of high inflation, with central banks around the world, led by the Federal Reserve, competing to raise interest rates, while only a few countries like China are in a rate-cutting cycle.

During this period, the Bank of China, with about 20% of its assets overseas, demonstrated revenue growth that outperformed its peers.

From 2022 to the first half of 2024, revenue growth decreased by a total of 4.06 percentage points under the pressure of narrowing interest margins, while the decline in growth rates for the six major state-owned banks during the same period exceeded 5 percentage points.

The Bank of China has stated that in 2022, it benefited from the Federal Reserve's interest rate hikes, which improved the yield on its foreign currency assets; driven by various factors, the group's net interest margin increased by 1 percentage point year-on-year to 1.76%.

In 2023, it seized the opportunity of the Federal Reserve's interest rate hikes, further improving foreign currency interest margins; the total deposits and loans from overseas commercial bank clients increased by 6.28% and 0.88% year-on-year, contributing 19.21% to the total annual profit.

This trend is also reflected in 2024.

In the first and second quarters of that year, the Bank of China's net interest margin remained at 1.44%. The bank admitted, "The rise in foreign currency asset yields offset some of the downward impact on the yields of RMB assets."

But every coin has two sides.

As international mature economies enter a rate-cutting cycle, both overseas assets and liabilities may experience fluctuations amid the intensifying international rate-cutting tide.

Bank of China Vice President Liu Jin stated that in the future, there will be further improvements in the proactive management requirements for foreign assets and liabilities. "For example, promoting foreign currency bond investments, accelerating the transformation of overseas light capital, and closely monitoring the monetary policy trends of major economies."