Summary of Key Points
In the first half of this year, the net interest margin of A-share listed banks—key indicator of their profitability—finally stopped its continuous decline and began to stabilize or even show a slight increase. However, this improvement was mainly due to reduced costs on the liability side (i.e., lower interest expenses). The interest income from lending (on the asset side) continued to decline. As the benefits of these cost-saving measures diminish, there is still pressure for the net interest margin to fall. Banks are responding by optimizing their deposit and loan structures and seeking additional revenue sources.
I. Net Interest Margin Stabilizes: Banks Finally Get a Breath
What is the net interest margin? Simply put, it is the difference between the interest income from loans and the interest expenses from deposits, and this ratio directly determines how profitable a bank is. For over a year, this figure has been declining, but it has stabilized in the first half of this year:
- Among the 42 listed banks, 19 had a higher net interest margin than in the entire previous year, and 9 had a higher margin than in the first quarter of this year.
- Among the six major state-owned banks, Agricultural Bank of China, China Construction Bank, and Bank of China saw their net interest margins increase by 0.01%-0.02% (1-2 basis points) quarter-on-quarter, while Bank of Communications and Industrial and Commercial Bank of China remained unchanged.
- The industry-wide net interest margin for the second quarter was 1.41%, up 0.01% from the first quarter, marking the first quarter-on-quarter increase since 2022.
II. The Key to Stabilization: The Maturity of High-Interest Deposits and the Replacement with Lower-Interest Ones
The stabilization of the net interest margin is mainly due to banks paying less in interest on their liabilities. The main reason for this is the maturity of large amounts of high-interest fixed deposits:
- For example, fixed deposits with a term of three years, which may have offered interest rates of over 3% before 2022, began to mature in the first half of this year and were replaced by new deposits with rates of 1.5%-2%. As a result, the interest expenses for banks decreased significantly.
- Banks are also actively optimizing their deposit structure: For instance, the increase in demand for demand deposits (with interest rates of only 0.2%-0.3%) accounted for 70% of the total deposit growth. China Construction Bank saw its demand deposit volume increase by over 380 billion yuan, while the interest expense ratio decreased by 0.07%.
- The bank's foreign currency business also contributed to the stabilization, as the interest rates on foreign deposits are lower than those on RMB deposits, which widened the net interest margin.
III. Hidden Concerns: Declining Income from Lending
Despite saving on interest expenses, the income generated from lending (on the asset side) is still declining:
- The average yield on loans and bonds held by the six major banks decreased by 0.25%-0.32% compared to the same period last year.
- This is due to continuously falling loan interest rates (such as those set by the LPR) and weak demand for loans from both businesses and individuals, forcing banks to lower their lending rates to attract customers, thereby reducing their interest income.
IV. Future Pressures: The Benefits of Cost Savings Are Waning
Can the trend of stable net interest margins continue? The answer is uncertain, mainly due to two factors:
1. Weakening of the benefit from maturing fixed deposits: Fewer high-interest fixed deposits will mature in the second half of the year compared to the first half (for example, only 30% of Bank of Communications' deposits will mature in the second half), leaving less room for cost savings.
2. Continuing Pressure on the Asset Side: Loan yields are still declining, and bond investment returns are decreasing due to interest rate fluctuations. There is also limited room for further reducing deposit costs (after all, deposit interest rates cannot become negative).
V. Banks' Responses: Diversifying Revenue Sources to Maintain Profitability
To stabilize their net interest margins and profits, banks are taking various measures:
- Cost Reduction: Continuing to control high-cost deposits (e.g., issuing fewer high-interest certificates of deposit) and increasing demand deposits.
- Revenue Expansion:
- On the asset side, focusing on issuing loans with higher yields (e.g., to infrastructure projects and quality enterprises) while reducing loans with lower yields (e.g., real estate loans).
- Diversifying revenue channels: Engaging in financial market activities (bond trading, wealth management), expanding overseas business (e.g., Bank of China benefiting from foreign currency operations), and adopting digital transformation to reduce costs and improve marketing efficiency.
- Agricultural Bank of China plans to deepen its presence in rural markets to tap new loan demand, while China Construction Bank aims to enhance its comprehensive service capabilities, relying not only on loans but also on wealth management and insurance services.
Conclusion
The stabilization of bank net interest margins in the first half of the year is a positive sign, but the foundation is not solid—profitability mainly relies on cost savings rather than increased income. Whether this trend can continue depends on banks' ability to improve their asset-side returns and find new sources of revenue. For individuals, deposit interest rates are likely to continue to decline, but bank services (such as wealth management and digital products) will become more diverse and attractive.