Why do foreign banks expand in China despite weakening profitability?
Although foreign banks in China have been falling further behind domestic lenders in key profitability metrics over the past two years, the growth potential in wealth management and cross-border financing in the world’s second-largest economy might explain why they stay or even expand.
While net interest margins are trending lower for most banks in China amid Beijing’s accommodative monetary policies, foreign lenders have seen their returns on lending and other interest-earning assets fall more sharply than domestic institutions. As of March 31, the gap between the NIMs of foreign banks and the nation’s six largest state-backed commercial banks, for instance, widened to 47 basis points from 26 bps two years ago, according to the China Banking and Insurance Regulatory Commission, or CBIRC.
Margin pressure at China’s major banks may ease as economic SOS wanes
The largest banks in China may see easing pressure on their net interest margins, after they stayed in contraction in the first quarter, as lenders may extend fewer loans at the cheapest interest rates.
In the three months ended March 31, Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd. and Agricultural Bank of China Ltd. reported lower net interest margins compared with a year ago. Apart from Agricultural Bank of China, which did not disclose its NIM for the fourth quarter of 2020, three other state-backed lenders also reported a quarter-over-quarter contraction in their margins.