Summary
China’s top five banks posted modest year-on-year profit growth in the first half of the year, with gains anchored by falling deposit costs that helped counteract pressure from weak credit demand. The banks reported increases of between 3.3% and 5.1% for the period.
Results by lender
Bank of China recorded the largest increase among the group, with profits climbing 5.1%. Agricultural Bank of China followed with a 4.9% rise, while China Construction Bank posted a 4.6% increase. Bank of Communications delivered 4.0% growth, and Industrial and Commercial Bank of China, the world’s largest lender by assets, reported a 3.3% gain.
For four of these institutions, the reported first-half profit growth represented their strongest performance for the same period since 2022. Bank of Communications achieved its best first-half result since 2023.
Drivers of performance
Executives attributed part of the improvement to the repricing of higher-cost deposits that matured at the start of the year. As these deposits rolled off, average deposit costs fell, providing some relief to interest margins even as domestic loan demand stayed weak amid a slowing economy.
Data covering the broader commercial banking sector showed average net interest margins rose by one basis point to 1.41% in the second quarter compared with the prior quarter. That increase marked the first quarterly uptick since 2022, when property-related loan defaults weighed heavily on the Chinese economy and banks’ margins.
Outlook and executive caution
Bank executives cautioned that the benefit from lower deposit costs may not persist if weak loan demand continues to limit asset growth and margin expansion. They highlighted the potential for the deposit-cost tailwind to diminish as lenders contend with muted lending activity.
Key points
- Top-five Chinese banks reported H1 profit growth between 3.3% and 5.1%, driven in part by lower deposit costs.
- Average net interest margins in the commercial banking sector rose 1 basis point to 1.41% in Q2 - the first quarterly increase since 2022.
- Sectors impacted include the banking sector directly and broader credit markets tied to domestic loan demand.
Risks and uncertainties
- The deposit-cost advantage could fade if weak loan demand persists, putting renewed pressure on margins and profitability in the banking sector.
- A continued slowdown in domestic lending would affect lenders’ ability to translate funding relief into sustainable profit growth.