Summary of Key Points
This year, the interest margin in the banking industry has generally stabilized, but there is a clear differentiation among banks: some have seen a rebound, while others continue to experience a decline (for example, China Merchants Bank). Although China Merchants Bank’s interest margin is still declining, the rate of decline is rapidly slowing. The main reasons for this include issues on the asset side (unabsorbed loan repricing and insufficient credit demand) and the high proportion of retail credit (especially credit cards), which has led to a slowdown in the growth of higher-returning assets. However, the worst period for interest margins has passed, and the impact of loan repricing will be mitigated within the year. With the support of monetary policy and the regulation of industry competition, interest margins are expected to stabilize over time. China Merchants Bank is also working on asset allocation to strive for stability in its interest margins this year.
I. Understanding What an Interest Margin Is and the Current Situation in the Banking Industry
An interest margin is the core of a bank's profitability. Simply put, banks pay interest to attract deposits (cost) and earn interest from lending (revenue). The interest margin is the difference between revenue and cost, and it directly determines a bank's interest profit. This year, the interest margin in the banking industry has gradually stabilized, but there are significant differences among banks: some banks are seeing an increase in their interest margins, while others are still declining (such as China Merchants Bank). Peng Jiawen, the vice president of China Merchants Bank, stated that there will still be downward pressure on interest margins in the coming period, but they are expected to stabilize over time.
II. China Merchants Bank’s Interest Margin Is Declining, but More Slowly (Evidence from the Semi-Annual Report)
The changes in the semi-annual report are clear:
- Year-on-year Changes: In the first half of this year, China Merchants Bank’s net interest margin was 1.77% (a decrease of 0.02 percentage points compared to the same period last year), and its net interest yield was 1.83% (a decrease of 0.05 percentage points). Interest income decreased by 2.42% year-on-year, with loan interest income declining by 5.99%.
- Month-on-month Changes: Compared to the end of last year, the net interest margin only decreased by 0.01 percentage points, and the net interest yield decreased by 0.04 percentage points—indicating a significant slowdown in the decline. Despite the decrease in loan interest income, net interest income (total interest income minus total interest costs) increased by 5.6% year-on-year, possibly due to higher returns from other sources of interest income, such as bond investments.
III. Two Main Reasons for China Merchants Bank’s Declining Interest Margin: External Pressures and Internal Structural Issues
1. External Pressures on the Asset Side:
- Unabsorbed Loan Repricing: Many loans issued in the past were at floating rates, which change with market interest rates. Now that market interest rates have lowered, the interest income from these loans has also decreased, and this impact has not yet fully subsided.
- Insufficient Credit Demand: There is less demand from businesses and individuals for loans, forcing banks to lower loan interest rates to attract customers, resulting in reduced loan interest income.
2. Internal Structural Issues: China Merchants Bank has a high proportion of retail credit (especially credit cards), which traditionally generate higher returns. However, the growth of these assets has slowed, leading to a decrease in the overall interest margin.
IV. The Worst Period for Interest Margins Has Passed, and They Will Stabilize Over Time
Peng Jiawen believes that the most challenging period for interest margins has passed, and there are several favorable factors now:
- Improving Macroeconomic Environment: Support from monetary policy (such as the central bank maintaining stable interest rates) and more regulated industry competition mean that banks are pricing more rationally.
- Impact of Repricing Will Soon Subside: The impact of loan repricing is expected to be fully mitigated within the year. If interest rates do not continue to decline, interest margins will stabilize.
- China Merchants Bank’s Response: The bank will focus on asset management and strategic asset allocation (e.g., adjusting the loan portfolio to include more stable-income loans or increasing investments in bonds) to achieve stability in its interest margins this year.
V. A Conclusion That Is Easy to Understand for the General Public
Although China Merchants Bank’s interest margin is still declining, the rate of decline has slowed, and the worst phase has passed. As long as interest rates do not continue to fall, interest margins will stabilize over time. For China Merchants Bank, the next step is to adjust its asset structure to generate more stable interest income. For ordinary depositors and investors, this means that the bank’s profit pressure will gradually decrease, and its operations will become more stable.