Bank Profits Under Pressure as Non-Performing Loans Remain High: The Conflict Between Dividends and Capital Accumulation Intensifies (AI Translation)

【周刊提前读】银行利润承压不良未降 分红与资本积累矛盾凸显

The financial performance of China's banking sector in 2023 reflects a challenging environment, with many banks experiencing declines in revenue and net profit growth amidst a slow economic recovery post-pandemic. The dual objectives of promoting development while preventing risks have been complicated by factors such as weak expectations, insufficient demand, and narrowing interest margins. Despite relatively fast asset growth, the banking sector has seen a year-over-year decline in revenue and a slowdown in net profit growth. Non-performing loan ratios for corporate real estate loans remain high, indicating persistent risk control pressures [para. 1].

Statistics from Caixin reveal that the six major banks in China experienced an average revenue growth rate of 0.58% in 2023, a decrease from the previous year. The average net profit attributable to shareholders increased by 1.91% year-on-year, marking a significant slowdown from the previous year’s growth rate. Among the ten national joint-stock banks listed on the stock market, there was an average year-over-year revenue growth rate of -3.29%, with only Zheshang Bank achieving positive revenue growth [para. 2].

Listed city and rural commercial banks showed significant individual differences in performance due to local resource endowments and regional economic development. At least five listed small and medium-sized banks saw their net profits attributable to the parent company increase by more than 15%, while others experienced significant declines [para. 3].

The negative revenue growth or deceleration among many large and medium-sized banks is attributed to pressures on both net interest income and net fee and commission income. The continuous narrowing of the net interest margin has made it difficult to compensate for volume with price, while factors such as the prolonged downturn in the capital market have weakened wealth management income engines [para. 4].

Some banks have managed to smooth net profit fluctuations by reducing provisions for asset impairment losses. However, despite these efforts, there were still 12 major banks and listed joint-stock banks that barely achieved year-over-year positive growth in net profit attributable to the parent company [para. 5].

China Merchants Bank President Wang Liang described 2023 as extraordinarily challenging, noting that many policies introduced will predominantly impact 2024, especially in its first quarter [para. 6]. Guangfa Securities predicts further pressure on revenue growth for most banks in Q1 2024 but expects gradual recovery thereafter [para. 7].

To address profitability challenges, China Merchants Bank plans to expand sources of low-cost liability funds, strengthen effective allocation within the asset structure focusing on retail credit assets, diversify non-interest income growth channels, and strictly enhance cost control [para. 8]. Several bank executives emphasized maintaining reasonable credit growth without blind expansion to support the real economy commensurate with their own risk control level [para. 9].

Net interest income remains one of the primary sources of revenue for banks but has faced significant decline due to continued narrowing of net interest margins. Major reductions were observed among state-owned banks like Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), as well as Ping An Bank and Bohai Bank among joint-stock banking sector [para. 10].

Non-interest income serves as another pillar operating income but saw significant declines in net fees and commissions across major and medium-sized banks; however other non-interest incomes grew driven by investment gains[para. 11]. Real estate business risk remains a challenge for asset quality management with high proportions of non-performing loans noted across several major institutions[para. 12].

In response to operational challenges faced throughout 2023 including dividend distribution strategies were also highlighted with some institutions increasing their cash dividend payout ratios reflecting improved capital adequacy ratios or strategic goals towards becoming "value" entities[para. 13]. Balancing dividends with capital supplementation needs emerges as a critical focus area against backdrop regulatory encouragements towards higher dividend payouts amidst ongoing economic uncertainties[para. 14].