Chinese State Banks Face Mounting Loan Losses as Capital Injection Looms

China's largest state-owned banks are grappling with rising bad loans and shrinking profit margins, Nikkei Asia reports. These challenges come as the Chinese government prepares a 500 billion yuan ($69 billion) capital injection to support the banking sector.

Executives from China's "big four" state lenders—Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), and Bank of China—warned that net interest margins (NIMs) will continue to shrink this year as the central bank implements further interest rate cuts to combat deflationary pressures.

"What kind of macroeconomic environment is lying in front of us?" ICBC President Liu Jun rhetorically asked at a briefing with reporters and analysts in Hong Kong on Friday. "You may easily imagine how such a low NIM environment is putting such pressure on our balance sheet, given its magnitude."

NIMs, a key indicator of bank profitability, measure the difference between interest paid and received. The combined nonperforming loans (NPLs) of the four banks reached 1.3 trillion yuan at the end of 2024, representing an 82 billion yuan increase from the previous year, according to their latest annual financial results.

While corporate loans remain a significant source of NPLs, personal loans, including mortgages and credit card debt, are emerging as a major area of concern. ICBC saw a 69% year-on-year jump in nonperforming personal loans, followed by ABC (54%) and CCB (53%). Conversely, bad corporate loans have declined.

Despite the increase in NPLs, the NPL ratio as a percentage of total loans decreased for the four banks, ranging from 1.25% to 1.34%. However, this ratio rose by 0.07 of a percentage point to 0.9% at Postal Savings Bank of China, a major player within the broader "big six" state banks.

Banks have also been offloading bad debt to state-backed asset management companies (AMCs), which restructure loans or sell them to other investors. China Cinda Asset Management, a leading AMC, reported a 6.6 billion yuan increase in distressed assets acquired from financial institutions in 2024.

The relentless pursuit of lower interest rates by the central bank has pushed NIMs to record lows. Agricultural Bank of China's NIM plummeted from 2.2% in 2020 to 1.42% last year.

"The People's Bank of China has stated that there will be 'timely cuts' in interest rates," said Sheng Liurong, chief financial officer at CCB, at a news conference on Friday. "Our NIM in general will be under a certain level of downward pressures."

ICBC's senior executive vice president, Yao Mingde, echoed these sentiments, stating that the downward trend in NIM is a shared challenge across the industry. However, both he and Sheng expressed optimism that the declines would ease this year.

Despite lower lending rates, growth in personal loans has remained sluggish. Bank of China's outstanding mortgages at the end of December stood 2% lower than a year earlier.

"The main challenge for the bank is constraints in monetary and credit growth shifting from supply-side to demand-side," said Bank of China Vice Chairman Zhang Hui, fueling competition among banks to offer lower interest rates.

The government's planned cuts to the loan prime rate (LPR), the benchmark lending rate for corporate loans and mortgages, could also put downward pressure on asset yields. While the LPR has remained unchanged since November, PBOC Governor Pan Gongsheng has pledged "timely" rate cuts.

Chinese banks have been under pressure since the introduction of tougher financial rules for real estate developers in 2020. The subsequent decline in home prices and weak job prospects have weighed on consumer confidence, further dampening their appetite for loans.

The "big four" banks managed to eke out a 2% annual increase in net profit, totaling 1.2 trillion yuan in 2024, thanks to gains from investment securities and a decline in impairment losses.

At the National People's Congress earlier this month, the government unveiled a stimulus package, including plans to issue 500 billion yuan in special treasury bonds to bolster the core tier-1 capital ratios of large state-owned banks.

Analysts believe this capital injection could enable the big banks to lend to consumers at lower interest rates. "We believe the injection underscores the government's very high propensity to support state banks, and that the central government may increasingly rely on state banks to carry out its policies," analysts at Fitch wrote in a report this month.

Despite the challenges, the stock prices of top state lenders have rallied since the initial wave of stimulus announcements in late September and have remained relatively