China's Top Banks Post H1 Profit Growth Amid Margin Relief and Weak Loan Demand

China's five largest state-owned banks reported modest profit growth in the first half of the year, as lower funding costs provided a crucial buffer against persistent pressure from weak credit demand in a slowing economy. The results show a sector navigating significant economic headwinds, with improved margins offering temporary relief.

First-Half Performance Highlights

The country's top lenders posted profit increases ranging from 3.3% to 5.1% for the six-month period. For four of the five banks, this marked the strongest first-half performance since 2022.

• Bank of China: +5.1%
• Agricultural Bank of China: +4.9%
• China Construction Bank: +4.6%
• Bank of Communications: +4.0%
• Industrial and Commercial Bank of China (ICBC): +3.3%

Lower Deposit Costs Boost Margins

The profit gains were largely driven by the banks' ability to reprice matured, higher-cost deposits at lower rates, which eased pressure on their funding costs. This dynamic helped support their net interest margins (NIM), a key measure of lending profitability.

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Data from the broader Chinese commercial banking sector showed the average NIM rose by one basis point to 1.41% in the second quarter from the prior quarter. According to the report, this was the first quarterly increase in the metric since 2022, when the sector was heavily affected by property-related loan defaults.

Outlook Clouded by Economic Headwinds

Despite the positive first-half results, the outlook remains cautious. Bank executives have expressed concern that the benefits from cheaper deposits may prove temporary.

The fundamental challenge of weak loan demand continues to weigh on the sector as China's economy decelerates. This ongoing pressure on credit growth could diminish the positive impact of lower funding costs in the coming quarters.