In Q1 2025, the net profit growth rate of listed banks declined by 1.1% year-on-year, shifting from the +2.4% growth in 2024 to negative growth, slightly below market expectations. We attribute this primarily to the following factors:
1. **Persistent Net Interest Margin Pressure Despite No Rate Cuts**: The simulated net interest margin in Q1 decreased by 5bps quarter-on-quarter to 1.33%, and declined by 10bps compared to 2024, leading to a 2.0% year-on-year drop in net interest income. Although the central bank did not cut interest rates in Q1, the net interest margin continued to shrink due to three reasons: First, the repricing of loans and bonds reduced asset yields. Second, weak credit demand in Q1 resulted in faster growth of short-term corporate loans and bill financing (with lower rates) compared to medium- and long-term corporate and personal loans. In an oversupplied credit market, the interest rates for newly issued corporate loans fell by 13bps, lowering the yield on newly deployed assets. Third, higher savings tendencies among households and businesses led to faster growth in time deposits than demand deposits. Banks also replenished liquidity through certificates of deposit and time deposits after losing interbank deposits, increasing the “stickiness” of liability costs. 2. **Bond Market Volatility Weighs on Non-Interest Income**: Rising bond market interest rates caused fair value losses on banks’ bond holdings, leading to a 3.2% year-on-year decline in other non-interest income (compared to +25.8% growth in 2024). This became the main unexpected factor behind the negative profit growth. Meanwhile, fee income fell by 0.7% year-on-year due to weak wealth management revenue and fee reductions. With net interest income, fee income, and other non-interest income all declining, revenue growth dropped by 1.7% year-on-year, down 1.8 percentage points from the +0.1% growth in 2024. 3. **Deteriorating Asset Quality in Personal Loans**: In Q1, asset impairment losses decreased by 2.4% year-on-year, a smaller decline compared to the -6.0% drop in 2024, reducing their contribution to net profit. This was mainly due to increased provisioning pressure from rising risks in personal loans. Although the overall non-performing loan (NPL) ratio for the industry continued to decline, the overdue ratio—a leading indicator—rose, signaling potential future NPL generation. Retail loans were the primary source of pressure, with the NPL ratio for personal loans at listed banks reaching 1.24% at the end of 2024, up 8bps from 1.16% in mid-2024. 4. **Weak Credit Demand and Diverging Asset Allocation**: Listed banks’ assets grew by 7.5% in Q1, unchanged from Q4 2024, but allocation diverged: 1) Loan growth slowed to 7.0%, reflecting subdued demand. 2) Investment in bonds and other assets accelerated, highlighting structural shifts in bank portfolios amid economic uncertainty.The growth rate remained at 9%, consistent with the fourth quarter. However, large state-owned banks and joint-stock banks experienced a decline in growth, while regional banks saw an increase. This divergence is primarily due to weaker credit demand faced by national banks, particularly the contraction in personal loan demand, which drove joint-stock banks’ loan growth to a historic low of 3.9%. In contrast, listed high-quality regional banks benefited from local economic vitality and more relaxed credit quotas, leading to a rebound in loan growth.
Fiscal front-loading efforts and accelerated government bond issuance drove a 13.0% year-on-year increase in financial investments by listed banks, up from 11.4% at the end of the previous year. However, the yield on these assets remains lower than that of loans. Interest rate cuts on interbank deposits led to liability outflows. Under liquidity pressure, banks reduced interbank lending, resulting in a 12.2% year-on-year decline in interbank assets, with large state-owned banks experiencing a 21.9% drop. Looking ahead, the negative profit growth in the first quarter may turn positive in subsequent quarters. However, key factors include potential tariff impacts, net interest margin trends, the room for provision support, and bond income contributions. Specifically: 1. **Potential Tariff Impacts**: Despite uncertainties, tariffs may affect bank asset quality through two channels: (1) increased credit risk for exposures related to foreign trade enterprises facing cash flow pressures, especially in coastal export-intensive provinces; and (2) indirect effects on personal loan repayment capacity via employment. Banks are expected to support foreign trade enterprises through liquidity loans and hedging products, but overall asset quality depends on the effectiveness of macro policies stabilizing domestic demand and foreign trade. 2. **Provision Contributions to Profit Growth**: Assuming a decline in the provision coverage ratio and loan-to-provision ratio to 150%/2.5%, static estimates suggest that listed banks could save credit costs, contributing 40%-50% to profits. However, with credit costs already low, further reductions may be limited, especially for banks with provision ratios close to regulatory requirements. Additionally, banks with insufficient non-performing loan recognition may face higher provisioning needs, reducing profit contributions. 3. **Net Interest Margin Trends**: Despite no rate cuts this year, weak credit demand has translated into lower-yielding asset allocations, pressuring margins. Loan and bond repricing at lower rates, coupled with the “stickiness” of deposit costs due to term deposits, continues to exert downward pressure on net interest margins.We believe there is still room for the LPR to decline by more than 30bp within the year to stimulate credit demand, with a higher probability of symmetric rate cuts where deposit rates are lowered in sync with the LPR. The reserve requirement ratio and relending rates are also expected to be reduced to lower banks’ liability costs. Overall, we estimate that bank net interest margins (NIM) could decline by 10-20bp to around 1.2% by 2025. In the long run, the breakeven point for NIM is approximately 0.8% assuming no rise in credit costs. Therefore, it is increasingly necessary to stabilize NIM and maintain reasonable bank profitability by reducing liability costs through policy measures.
4. How significant is the contribution from bond investment income? In recent years, other non-interest income related to bond investments has notably supported revenue. In 2024, other non-interest income accounted for 14.2% of total revenue, up significantly from 11.3% in 2023, with unrealized gains from OCI accounts being a key factor. We estimate that if all unrealized gains in OCI accounts of listed banks in 1Q25 were realized as profits, full-year profits could increase by 11.9%. We expect banks to continue contributing to revenue growth by partially realizing bond gains in 2025. However, rising bond market interest rates could lead to fair value losses and reduce the scope for realizing OCI account gains. Overall, the primary reason for the negative growth and underperformance of bank profits in the first quarter was the decline in investment income due to significant volatility in bond market rates. However, weak credit demand, NIM pressure, and rising credit risks in retail loans also warrant attention. Full-year bank profits may still turn positive, but the key factors depend on the effectiveness of macro policies to stabilize domestic demand and foreign trade, as well as monetary policy measures such as RRR cuts and relending rate reductions to support NIM. For bank investments, we recommend monitoring the implementation of economic stimulus policies, particularly the impact of household support measures on income expectations and consumption willingness. Bank dividends remain attractive, but fundamental pressures and ex-dividend factors may cause short-term stock price volatility. Investors should consider allocating to banks with high and stable dividends, as well as those with solid fundamentals and strong regional growth prospects. Author: Lin Yingqi et al., CICC, Source: CICC Monetary and Financial Research, Original Title: “Why Did Bank Profits Decline?” Risk Disclosure and Disclaimer: The market carries risks, and investment requires caution. This article does not constitute personal investment advice nor does it consider individual users’ specific investment objectives, financial situations, or needs. Users should assess whether any opinions, views, or conclusions in this article align with their particular circumstances.Invest accordingly at your own risk.
