The mid-year reports of listed banks have been disclosed, highlighting further pressures within the industry, with five out of six state-owned major banks experiencing a rare decline in both revenue and net profit.

Looking specifically at the reasons for the decline in profits of the major banks, the narrowing of the interest margin led to a reduction in net interest income, and the combination of fee reduction and concession, along with a weak capital market, continued to drag down middle-income. Against this backdrop, the counter-cyclical role of provisions is still under scrutiny. In the first half of the year, the six major banks reduced their impairment provisions by approximately 36 billion yuan compared to the same period last year, a decrease of over 8%, following three consecutive years of declining provisioning efforts.

Five major banks saw a decline in both revenue and net profit.

Last year, the overall revenue of state-owned major banks had already declined. In 2023, the six major banks collectively achieved a revenue of about 3.53 trillion yuan, a reduction of over 160 billion yuan compared to 2022's 3.69 trillion yuan; they achieved a net profit attributable to the parent company of 1.38 trillion yuan, a year-on-year increase of 286 billion yuan. Among them, ICBC and CCB saw a year-on-year decline in revenue, while the net profit attributable to the parent company of all six banks maintained positive growth.

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By the first quarter of this year, only Postal Savings Bank of China achieved a year-on-year increase in revenue, and only Bank of Communications saw a year-on-year increase in net profit attributable to the parent company. The mid-year report shows that in the first half of the year, the six major banks collectively achieved a revenue of about 1.8 trillion yuan, with a net profit attributable to the parent company of about 683.4 billion yuan, a reduction of about 47.3 billion yuan and 6.6 billion yuan, respectively, compared to the same period last year.

Specifically, only the Agricultural Bank of China maintained a slight year-on-year increase in both revenue and net profit attributable to the parent company, while the other five major banks all experienced a "double decline." Among them, Industrial and Commercial Bank of China saw the largest decline in revenue and net profit attributable to the parent company at 6.03% and 1.89%, respectively; followed by China Construction Bank, which saw a decline in revenue and net profit attributable to the parent company of 3.57% and 1.8%, respectively; Bank of Communications also saw a revenue decline of over 3%, with a net profit attributable to the parent company sliding by 1.63%.

As the main source of income for commercial banks, the decline in net interest income in the first half of the year has become a drag on the profits of many listed banks. The main reasons are, on the one hand, the slowdown in scale growth, and on the other hand, the continued narrowing of the net interest margin.

Data from the National Financial Regulatory Administration shows that as of the end of the second quarter of this year, the net interest margin of commercial banks was 1.54%, unchanged from the end of the previous quarter, and at a historical low. Among them, the net interest margin of large commercial banks further decreased from 1.47% at the end of the first quarter to 1.46%.

Looking at the financial reports, in the first half of the year, the net interest income of the three major banks, ICBC, CCB, and BOC, decreased year-on-year, with declines of 6.84%, 5.17%, and 3.09%, respectively, while the other three banks saw varying degrees of growth year-on-year.

In response, many banks have mentioned the pressure on the net interest margin from both the asset and liability sides. Data shows that by the end of the first half of the year, the net interest margins of ICBC, ABC, CCB, and BOC all decreased by more than 20 basis points (BP) year-on-year, and by more than 15 BP compared to the end of last year; in comparison, the fluctuations in the net interest margins of Postal Savings Bank of China and Bank of Communications were smaller, with the net interest margins narrowing by 17 BP and 2 BP year-on-year, respectively, by the end of the first half of the year.Looking back, the first quarter was significantly affected by factors such as repricing, leading to a larger decline in the net interest margin for various banks. In the second quarter, the decline was generally narrowed, with the net interest margin of Agricultural Bank and Bank of Communications increasing by 1 basis point (BP) and 2 BP respectively against the trend on a quarter-over-quarter basis.

Regarding the drag on net interest income from the net interest margin, many banks mentioned factors such as the adjustment of the Loan Prime Rate (LPR), the adjustment of existing housing loan interest rates, the rigidity of deposit costs due to term structure, and support for the real economy.

Industrial and Commercial Bank of China stated in its financial report that the decline in net interest income was mainly due to factors such as the reduction of LPR, the adjustment of existing housing loan interest rates, and changes in the term structure of deposits. The net interest margin and net interest spread decreased by 28 BP and 29 BP year-on-year, respectively.

Postal Savings Bank of China achieved a net interest income of 142.876 billion yuan in the first half of the year, an increase of 2.571 billion yuan year-on-year, representing a growth of 1.83%. Among this, scale growth led to an increase in net interest income of 14.547 billion yuan, while interest rate changes resulted in a decrease of 11.976 billion yuan.

Several large banks that maintained positive growth in net interest income despite the downward trend in the interest spread mainly benefited from the positive contribution of scale growth, which offset the negative contribution of the spread. Taking Agricultural Bank as an example, the bank achieved a net interest income of 290.848 billion yuan in the first half of the year, an increase of 427 million yuan year-on-year. The scale growth led to an increase in net interest income of 32.223 billion yuan, while interest rate changes led to a decrease of 31.796 billion yuan.

The decline in asset-side returns was significantly faster than the decline in liability-side costs.

Since last year, deposit interest rates have been adjusted downward multiple times, and the effects have been gradually emerging. However, not only state-owned large banks but also 40 out of 42 listed banks continued to see a decline in the net interest margin in the first half of the year, with the range being from 1 BP to 42 BP. Behind this, the main reason is that the decline in asset-side returns was significantly faster than the decline in liability-side costs.

Bank of Communications mentioned that the year-on-year decline in the net interest margin was mainly due to the rapid decline in the yield on customer loans. First, the reduction of LPR, coupled with insufficient effective credit demand and intense competition for high-quality projects, led to a year-on-year decline in the interest rates of newly issued loans. At the same time, the repricing of loans and the adjustment of existing housing loan interest rates have a continuous impact. Second, influenced by factors such as the sluggish real estate market, the willingness of residents to consume and the demand for housing purchases need to be improved, leading to a decrease in the proportion of credit card loans and housing loans, which have relatively higher yields.

China Construction Bank also mentioned that the asset-side yield was lower than the previous year due to multiple reasons, including the reduction of LPR rates, low market interest rates, and continuous support for the real economy. The decline in the liability-side interest payment rate was smaller than the decline in the asset-side yield due to reasons such as asymmetric interest rate cuts and the lag of deposit rate cuts behind loan rate cuts, as well as structural changes.

Looking at the most critical loan income and deposit costs from the asset and liability sides, the annualized average yield on loans (mainly domestic) of various large banks in the first half of this year generally decreased by more than 30 BP year-on-year, with Industrial and Commercial Bank of China and China Construction Bank seeing a decrease of more than 40 BP. Compared to the year-on-year changes for the whole year of 2023, only Agricultural Bank saw an improvement in the decline, and Postal Savings Bank of China maintained the same level of decline in the first half of this year, while the other four large banks all experienced different degrees of expansion in the year-on-year decline of loan income.During the same period, in terms of the average interest paid on deposits, except for a slight increase year-on-year at Bank of China, the interest paid on deposits for the other five major banks all decreased to varying degrees, but the decline was not as significant as the decrease in loan earnings. Specifically, the annualized average interest paid on deposits at Bank of Communications decreased by 14 basis points (BP), while those at Agricultural Bank of China, Industrial and Commercial Bank of China, Postal Savings Bank of China, and China Construction Bank decreased by 7BP, 6BP, 6BP, and 5BP, respectively.

Structurally, the more pronounced declines in deposit cost rates and loan yield rates were observed in medium to long-term products. In both corporate and personal business, the decrease in personal loan yield rates and deposit interest rates was higher than that for corporate entities. Compared to 2023, against the backdrop of the cessation of "manual interest subsidies," the corporate interest rate mainly showed a year-on-year decline this year, while the personal interest rate had already begun to show a decrease last year.

Multiple bank financial reports and performance meetings have revealed that, affected by several adjustments to the Loan Prime Rate (LPR) within the year, the net interest margin is expected to face certain downward pressure in the short term. Adjusting the asset-liability structure is the main measure most banks are currently taking to cope with the pressure on net interest margins.

Regarding the significant narrowing of the year-on-year decline in the net interest margin for the first half of the year (2BP) compared to the full year of last year (20BP) by 18BP, Bank of Communications mentioned three main reasons: first, increasing the allocation of assets with relatively higher yields, such as substantial loans, and reducing the scale of low-yield assets like bills; second, persisting in optimizing the liability structure and reducing liability costs, assessing market interest rate trends and strategically deploying market-oriented funds; third, reasonably arranging the pace of foreign currency asset allocation and liability absorption.

It is noteworthy that, considering the continued slump in the real estate market and the slow recovery of consumer demand, discussions on adjusting existing mortgage loan interest rates have recently resurfaced. According to calculations by Lin Yingqi, a banking analyst at CICC, assuming that all mortgage loan interest rates are adjusted to the level of newly issued rates through mortgage transfers and independent adjustments, the average existing mortgage rate would decrease by about 60BP, affecting the bank's net interest margin by 7BP, operating income by 4%, and net profit by 7%; assuming that the scope of mortgage transfers only includes first-home mortgages, the average existing mortgage rate would decrease by about 54BP, with an estimated impact on the bank's net interest margin of 6BP, operating income by 3%, and net profit by 7% (annualized, without considering the offset of deposit rate cuts).

However, institutions still anticipate further interest rate cuts on deposits within the year. Lin Yingqi believes that if the liability cost is adjusted synchronously, the overall impact of adjusting existing mortgage loan interest rates on the interest margin is expected to be neutral. "In fact, even without adjusting the existing mortgage rates, residents may still be exerting pressure on bank interest margins by repaying loans in advance or by replacing them with business and consumer loans." He believes that the stabilization of the interest margin fundamentally depends on whether residents can improve credit demand by reducing debt pressure, and the assessment of the impact of reducing existing mortgage loan interest rates on banks needs to be comprehensively considered. The policy support for the real economy is also crucial for the fundamental aspects of banks.

Intermediate income is weak, and provisions continue to nourish.

Affected by the reduction of fees and benefits in wealth management business and the increased volatility of the capital market, the non-interest income of banks did not show a significant improvement in the first half of this year. Among them, net fees and commissions, as the main component, saw a more significant year-on-year decline than the full year of last year, further reducing the support for profits.

In the first half of the year, the net fees and commissions of Postal Savings Bank of China, Bank of Communications, and China Construction Bank all decreased by more than 10% year-on-year, and the other three banks also saw a decrease of more than 5%.

Among them, against the backdrop of a nearly 50% decrease in related expenses, the net fees and commissions of Postal Savings Bank of China still decreased by 16.71% year-on-year. In response, the bank stated that this was mainly due to the impact of the "unified reporting and handling" policy, which led to a reduction in agency insurance business income. However, the bank's investment banking business fee income and wealth management business fee income both achieved growth against the trend.Bank of Communications saw a year-on-year decrease of 14.56% in net fee and commission income. The bank attributed this mainly to the combined effects of capital market fluctuations, weak consumer spending, continuous fee reductions and benefits, and adjustments in product fee rates, which led to a significant year-on-year decline in income from agency, investment banking, and bank card business.

China Construction Bank's net fee and commission income for the first half of the year was 62.696 billion yuan, a decrease of 7.905 billion yuan from the same period last year, a drop of 11.20%. The bank also mentioned that the fee reduction policy led to a year-on-year decrease in agency business fees, and the demand from customers in some industries did not meet the same period last year, resulting in a year-on-year decrease in advisory and consulting fees. Additionally, due to the rapid decline in market interest rates, the internal rate of return on asset management products narrowed, and related income decreased compared to the same period last year.

Under the pressure of continued challenges to their main sources of income, the counterbalancing role of banks' provisions has attracted more attention. Especially last year, the reduction in income and increase in profits of large banks were, to some extent, supported by a decrease in impairment provisions.

Wind data shows that in the first half of this year, the six major banks collectively provided for impairment of about 400.9 billion yuan, a reduction of about 36 billion yuan from the 436.8 billion yuan in the same period last year, a decrease of about 8%, with different degrees of reduction in the provisioning strength of each bank. Among them, Industrial and Commercial Bank of China's impairment provisions decreased by more than 20 billion yuan year-on-year, a decrease of 16.51%.

Looking back, since 2021, the provisioning strength for asset impairment of state-owned large banks has continued to decline. Last year, except for a slight increase at Bank of China, the other five large banks all had different degrees of downward adjustments in their impairment provisions, with the largest decreases at Postal Savings Bank of China and Industrial and Commercial Bank of China.

Despite the annual reduction in provisioning, due to factors such as recent improvements in non-performing assets, the provision coverage ratios of various banks remain at relatively high levels. As of the end of the first half of the year, the non-performing loan provision coverage ratios of Postal Savings Bank of China and Agricultural Bank of China still maintained above 300%, with the former adjusting down nearly 22 percentage points from the end of last year, but still leading the large banks with 325.61%. In addition, China Construction Bank's provision coverage ratio slightly decreased in the first half of the year, while the provision ratios of the other four major banks all increased.

As early as last year, the central bank had set up a special column in the monetary policy implementation report to remind people to view the profit levels of China's commercial banks reasonably. It mentioned that China's economic operation is facing many difficulties and challenges, and in this process, it is necessary to further play the important role of banks in serving the real economy and to facilitate a virtuous cycle of economic and financial operations. Considering that financial cycles and economic cycles are often not completely synchronized, the exposure of bank credit risks requires a certain period, and there should be some financial preparation and risk buffering. Allowing banks to maintain their own stable operation through reasonable means can enhance their ability to continue to support the development of the real economy. Of course, the profitability of commercial banks will also fluctuate with the economic cycle, and this should be viewed rationally without over-interpretation.