China’s ‘Big Bang’ Economic Stimulus: Banks Brace for Squeezed Margins and Deteriorating Assets

Banks could potentially face the unintended consequences as China's 'big bang' tightens profit margins and diminishes assets. According to a prediction by S&P Global Ratings, banks' net interest margins could see a decrease of 0.2 percentage points.

Analysts suggest that Chinese banks could unexpectedly suffer due to the government's recent announcement of various economic boost measures. These banks might struggle with shrinking profit margins and a decline in the quality of mortgages.

S&P Global Ratings estimates that banks' net interest margins could potentially shrink by one-fifth of a percentage point, or 20 basis points. They also predict a 14 basis point decrease in return on assets, necessitating a quarter point reduction in the average deposit rate to offset the consequences. The rating firm's analysts note that this could prove difficult for banks with a less robust deposit base and regulatory safeguards, in their analysis following the policy announcement.

The Net Interest Margin (NIM), which refers to the profit a bank makes from the disparity between the interest it charges on loans and the interest it pays on deposits, is a fundamental income stream and an indicator of its financial success. This margin saw a decline when the People's Bank of China directed banks to cut their mortgage rates by half a percentage point on current loans, all the while maintaining the same rates on deposits.

Vivian Xue, the director of Asia-Pacific financial institutions at Fitch Ratings, anticipates that banks' Net Interest Margin (NIM) will continue to face challenges in the latter half of the year and potentially through 2025. This is due to the existing cuts in mortgage rates and government orders to decrease borrowing costs to boost the economy. However, she believes that this could be somewhat balanced by additional reductions in the reserve requirement ratio and deposit rates.

One hour and twenty

China declares a reduction in mortgage rates as a part of fresh initiatives to stimulate the economy.