The Operating Cash Flow of Several Banks Plummets Year-on-Year: Short-Term Phenomenon or Ongoing Trend? (AI Translation)

多家银行经营性现金流净额同比断崖式下降 是短期现象还是已成趋势？

The recent release of the 2024 interim financial reports of various listed banks highlighted a notable divergence in net profit performance across different types of banking institutions during the first half of the year, focusing attention on significant fluctuations in certain items within their cash flow statements [para. 1].

The "Net Cash Flow from Operating Activities" is a crucial item on the cash flow statement of commercial banks and provides insights into a bank’s financial health. This figure is derived by subtracting cash outflows from operating activities from cash inflows generated by the same activities. Key elements influencing this value include changes in customer deposits, borrowings from the central bank, and cash received or paid related to other operating activities [para. 2]. Ideally, in a healthy economic environment, the net cash flow from operating activities should remain positive. However, trending issues in the recent years have shown some banks reporting significant negative changes, raising concerns about potential liquidity issues [para. 3].

In the first half of 2024, only the Postal Savings Bank of China, out of the six major state-owned banks, reported a positive and slightly increasing net cash flow from operating activities. The Bank of China (BOC) and Bank of Communications (BoCom) reported negative net cash flows, while Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), and Agricultural Bank of China (ABC) reported significant year-on-year declines in their net cash flows [para. 4][para. 5]. National joint-stock banks like China Merchants Bank and Ping An Bank reported positive increases, while others such as Industrial Bank, China CITIC Bank, and China Minsheng Bank reported negative net cash flows [para. 6][para. 7].

Zeng Gang, chief expert at the Shanghai Finance and Development Laboratory, attributed these fluctuations primarily to changes in the net increase in deposits. He explained that a stable deposit source is essential for the smooth operation of commercial banks, and the substantial declines in the net increase in deposits are due to shifts in operating strategies by banks aiming to optimize their liabilities amidst narrowing net interest margins [para. 8]. Such strategic changes have led to a tangible reduction in the net increase of deposits, but Zeng believes these effects are short-term and unlikely to persist in the long term [para. 9].

Banks experienced a notable shift in deposit trends during the first half of 2024 due to various factors, including a strong wealth management market, market interest rate self-regulation, and an intentional restructuring to reduce high-cost deposits. Notably, large and medium-sized banks lost corporate deposits, which were redirected toward wealth management products or smaller banks offering higher interest rates [para. 10][para. 11].

Comparative data from the central bank supports these findings, showing a decrease in corporate deposits and indicating a larger shift in banking practices towards maintaining liquidity and profitability amid challenging economic conditions. This trend was particularly apparent for major banks where the first half of 2024 saw a substantial reduction in net inflows [para. 12][para. 13].

The reduction in high-cost deposits and adjustments to operational strategies have generally helped stabilize banks' net interest margins (NIM). Yet, industry insiders like Zeng Gang warn that a prolonged significant decline in net operating cash flow could indicate deeper liquidity issues, necessitating careful monitoring and potential regulatory intervention [para. 14][para. 15].

Zeng emphasizes that commercial banks must balance liquidity and cost reduction when adjusting their liabilities. A long-term drop in net operating cash flow could precipitate liquidity pressures, prompting banks to either shrink their credit issuance scale or find alternative funding sources [para. 16][para. 17].

Regulatory constraints also mandate that commercial banks maintain specific liquidity ratios and other risk management measures to mitigate potential liquidity crises. Recent data shows commercial banks have generally increased their liquidity ratios and maintained an optimal loan-to-deposit ratio, suggesting most banks are managing to stay compliant and resilient despite the observed issues [para. 18][para. 19].