China’s largest banks increased their share of the banking sector last year

Total assets of the banking sector grew by 10 % in 2023, roughly matching the growth pace of the previous year. Over the past two years, the balance sheets of China’s biggest banks have grown faster than the average (up 13 % y-o-y), and the role of large banks in the banking sector has again began to increase after years of decline. The total assets China’s largest banks rose to 42 % of the entire banking sector assets last year. Total assets were otherwise divided fairly evenly among shareholding banks (17 % of total assets), city banks (13 %), rural banks (13 %) and other financial institutions (14 %).

Commercial banks generate the lion’s share of their revenues from the net interest margin, i.e. the difference between what they pay on deposits and what they earn on loans. The average interest margin in the banking sector has shrunk for years, falling to just 1.69 % last year. As a result, bank profits were up by just 3 % last year, lagging the overall pace of economic growth. The narrowing of bank margins in part reflects emerging competition from mobile systems. Recently, shrinking margins has also been driven by low demand for bank loans and the explosive growth of household deposits during the height of the Covid-19 pandemic. Policy guidance has also played a role with the government supporting the economy –particularly the real estate sector – through rate cuts and directing lending to struggling borrowers. Moreover, the leadership has urged all players in the banking sector to be more patriotic, while turning its investigative focus to financial sector corruption.

Given the rapid descent of China’s economy into indebtedness, its pandemic-era economic problems and the collapse of the real estate sector, one would expect to begin seeing signs of erosion in the quality of bank lending portfolios. Commercial banks, however, report a decline in non-performing loans (NPLs) ratios ant the ratio was at the end of last year lower than in 2019. Although the NPL ratio has not risen, it is clear that the quality of bank lending portfolios are under considerable stress. During the height of the covid pandemic, small and medium-sized enterprises were given the possibility to postpone their debt-servicing payments, which was later extended by the government. It is also common in China for banks to grant new loans in order to retire old loans, especially in situations where the borrower is somehow associated with central- or local-government activities. For example, state-owned banks were ordered last autumn to grant new loans to local government financial vehicles (LGFVs) to retire older high-interest loans and replace them with longer-maturity, lower-interest loans.

China’s big banks are generally solid, while small and mid-sized banks face a range of challenges. Even before the pandemic, some small and mid-sized banks were on brink of insolvency and had to be bailed out with public funds (BOFIT Weekly 40/2020). Some of the China’s small and mid-sized banks in particular have been clobbered by the real estate sector collapse as their share of total lending to the real estate sector can be disproportionately large. One proposed solution has been to merge small banks to form larger, more diversified, banks. Bloomberg reports that officials are currently moving in this direction.