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Recently, the National Financial Regulatory Administration released the data on key regulatory indicators for the banking industry for the second quarter of 2024.

Overall, in the first half of this year, the total assets of the banking industry continued to grow. The total assets of financial institutions in the banking sector, in both domestic and foreign currencies, amounted to 433.1 trillion yuan, a year-on-year increase of 6.6%. Among them, the total assets of large commercial banks, in domestic and foreign currencies, were 185.1 trillion yuan, a year-on-year increase of 7.9%, accounting for 42.7% of the total; the total assets of joint-stock commercial banks, in domestic and foreign currencies, were 72.1 trillion yuan, a year-on-year increase of 3.7%, accounting for 16.7%.

The net interest margin of commercial banks in the second quarter was 1.54%, remaining consistent with the first quarter. In terms of asset quality, the overall quality of bank credit assets remained stable, with a decline in both the balance of non-performing loans and the non-performing loan ratio.

Net Interest Margin Remains Flat Quarter-on-Quarter

As various liability cost control measures become more effective, the pressure on the narrowing of banks' net interest margins is gradually easing.

Data disclosed by the Financial Regulatory Administration shows that on a quarter-on-quarter basis, the net interest margin of commercial banks in the second quarter was 1.54%, consistent with the first quarter; on a year-on-year basis, it decreased by 20 basis points compared to the second quarter of last year (1.74%).

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Looking at different types of banks, the net interest margin of state-owned large banks and joint-stock banks has narrowed compared to the first two quarters of 2023, while the net interest margin of city commercial banks and rural commercial banks has slightly expanded on a year-on-year basis.

Specifically, for different types of institutions, the net interest margin of joint-stock commercial banks in the second quarter increased by 0.01 percentage points from the first quarter, to 1.63%; the net interest margins of city commercial banks and rural commercial banks remained consistent with the first quarter, at 1.45% and 1.72% respectively; the net interest margins of large commercial banks, private banks, and foreign banks further narrowed in the second quarter compared to the first quarter, at 1.46%, 4.21%, and 1.46% respectively.

Lu Zhengzhi, Chief Economist at Industrial Bank, believes that the main reason for the relatively stable net interest margin of banks is the downward trend in the cost rate on the liability side, amid the continuous decline in the interest rates of newly issued loans.

Data shows that the weighted average interest rate of newly issued RMB loans in June 2024 was 3.68%, a decrease of 0.15 percentage points from December 2023. Among them, the weighted average interest rate for general loans was 4.13%, a year-on-year decrease of 0.22 percentage points; the weighted average interest rate for corporate loans was 3.63%, a year-on-year decrease of 0.12 percentage points; the weighted average interest rate for personal housing loans was 3.45%, a year-on-year decrease of 0.52 percentage points.At the same time, in the second quarter, under strict regulatory measures such as "manual interest supplementation" and the removal of smart deposits, the cost rate of bank deposits has decreased.

Data from Rong360 shows that compared to December 2023, the posted interest rates for fixed-term deposits of all maturities in June 2024 have decreased, with longer-term fixed deposits experiencing a larger drop in interest rates. Among them, the interest rate for 5-year and 3-year fixed-term deposits saw the largest decline, reaching 0.07 and 0.03 percentage points, respectively.

Lu Zhengwei stated that after the superposition of various factors, the downward trend of the interest-bearing liability cost rate basically matches the downward trend of the interest-earning asset yield rate, thereby maintaining the net interest margin relatively stable on a quarter-over-quarter basis.

Wang Yifeng, Chief Financial Analyst at Everbright Securities, also said that as factors such as concentrated repricing at the beginning of the year, the reduction of existing mortgage loan rates, and other factors are digested, and as the benefits of deposit rate cuts are further released, the pressure of narrowing interest margins is partially alleviated. Especially in April, the Market Interest Rate Pricing Self-Discipline Mechanism issued the "Initiative on Prohibiting High-Interest Deposit Attraction through Manual Interest Supplementation to Maintain the Order of Deposit Market Competition," stopping the "manual interest supplementation" for deposits. Due to the large scale of "super self-discipline" deposits previously, as commercial banks focus on rectification in the second quarter under strict regulatory environments, it helps to alleviate the pressure of deposit costs, especially for some banks that have made good progress in "manual interest supplementation" rectification, the net interest margin is expected to stabilize or rebound slightly in a phased manner.

Following the collective reduction of deposit rates by state-owned large banks in December last year, on July 25th of this year, the six major banks once again lowered the posted interest rates for personal deposits. In the view of market analysis, after this round of deposit rate cuts, the net interest margin of commercial banks will remain relatively stable, and the pressure of continuous narrowing has been somewhat relieved.

The growth rate of net profits of rural commercial banks has declined.

In the first half of the year, the year-on-year growth rate of the cumulative net profit of commercial banks has slowed down, but the pace of decline has eased.

Data from the Financial Regulatory Administration shows that in the first half of 2024, commercial banks achieved a cumulative net profit of 1.3 trillion yuan, a year-on-year increase of 0.4%, with a quarter-over-quarter decline. The average return on equity was 8.91%, a decrease of 0.65 percentage points from the end of the previous quarter. The average return on assets was 0.69%, a decrease of 0.05 percentage points from the end of the previous quarter.

The main reason for the quarter-over-quarter decline in the profit growth rate of commercial banks is the drag from rural commercial banks, while the profit growth rate of state-owned banks, joint-stock banks, and city commercial banks has marginally improved.

Looking at different types of banks, the net profit growth rate of rural commercial banks has decreased, while the net profit growth rate of other types of commercial banks has increased quarter-over-quarter.According to Wang Yifeng's analysis, the profit growth rates of state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks in the first half of the year were -2.9%, 1.4%, 4.3%, and 6.0%, respectively. Among them, the profit growth rates of state-owned banks, joint-stock banks, and city commercial banks in the first half of the year increased by 1.7, 0.3, and 0.3 percentage points compared to the first quarter, while the rural commercial banks' profit growth rate decreased by 9.5 percentage points compared to the first quarter.

Lu Zhengwei believes that the continuous narrowing of the year-on-year decline in net interest margin and the basic stability on a quarter-on-quarter basis are important factors supporting the growth of net profits.

Looking at asset quality, the proportion of banks' special mention loans increased on a quarter-on-quarter basis for the first time since 2017 at the end of the second quarter. Data shows that at the end of the first half of 2024, the proportion of banks' special mention loans was 2.20%, up by 0.04 percentage points from the end of the first quarter.

In terms of non-performing loan ratio, at the end of the first half of 2024, the non-performing loan ratio of banks was 1.56%, down by 0.03 percentage points from the end of the first quarter.

By type of bank, the non-performing loan ratios of large commercial banks, city commercial banks, and rural commercial banks were 1.24%, 1.77%, and 3.14%, respectively, down by 1 basis point (BP), 1BP, and 20BP from the first quarter, while the joint-stock banks' ratio remained unchanged from the first quarter at 1.25%.

The Bank of China Research Institute, in its third-quarter global banking industry outlook report, analyzed that for the full year, as the real economy steadily recovers and the operating conditions of corporate entities improve, banks will strengthen forward-looking management, further increase the intensity of regular re-inspection of various asset qualities, accurately identify non-performing assets, and scientifically and reasonably allocate provisions at an appropriate level. At the same time, under the logic of "using abundance to offset scarcity," effectively using the dynamic provisioning mechanism to absorb asset losses will lay the foundation for the normalization of profit growth and the sustainable development of banks. In 2024, the asset quality of commercial banks is expected to continue its robust trend, and the non-performing loan ratio is likely to remain stable near the low level of 1.6%.