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China Construction Bank sees more policy support from Beijing, despite pressure on state-owned lenders to boost profit

China Construction Bank (CCB) expects Beijing to introduce more policy support to bolster the economy, even as the nation's major state-owned lenders continue to face pressure to boost profits amid the prospect of benchmark rates decreasing further.

"China's economy is showing signs of recovery, but there is room for more policy support, and big banks need to continue to support the real economy," CCB chief financial officer Sheng Liurong said on Tuesday during the bank's latest financial results briefing.

Sheng said China's financial regulators could continue to lower financing costs as a means to shore up confidence. Key benchmarks, including banks' reserve requirement ratios (RRR) and loan prime rates (LPR) - the pegs for household, corporate and mortgage loans - could see further cuts in the coming months, he added.

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That view by CCB, the country's second-largest bank by assets, reflects the confidence of major state-owned lenders in the strategic policy measures being pursued by Beijing.

A security guard walks outside the People's Bank of China headquarters in Beijing on March 6, 2024. Photo: AP alt=A security guard walks outside the People's Bank of China headquarters in Beijing on March 6, 2024. Photo: AP>

In February, the People's Bank of China (PBOC) unveiled a 25-basis-point cut to the five-year LPR, a key mortgage benchmark, to boost housing demand, marking the most significant cut that the mainland's central bank has made since it revamped the system in 2019. The PBOC last cut the rate by 10 basis points in June.

That measure followed the central bank's announcement in January, cutting the RRR by 50 basis points from February 5, in a bid to inject 1 trillion yuan (US$138 billion) worth of liquidity into the market.

Still, bank profits, measured by net interest margins (NIMs), have been further squeezed by a cut to the five-year LPR.

The NIM of CCB dropped to 1.7 per cent from 2.01 per cent a year ago, while Bank of China (BOC) - the country's oldest and largest international lender - saw its NIM fall to 1.59 per cent from 1.75 per cent in 2022.

The two banks' senior executives, who hosted separate earnings briefings on Tuesday, said they have taken proactive measures to fend off the hit on profitability.

"[The bank's] interest spread should still face great pressure this year," said Zhang Yi, executive vice-president of BOC. The LPR cuts "will impact the entire year this year".

He said BOC will continue to optimise its asset structure to fully protect the demand for real financing and increase the investment in personal housing and consumer loans.

"Retail loans are among our loan types with high yields, less capital occupation and low risk costs," BOC's Zhang said. "This year, we will increase our efforts in allocating credit resources in this regard."

Meanwhile, CCB president Zhang Jinliang singled out a few measures to protect the bank's profit, including stabilising its interest income, boosting its non-interest income, improving its capital structure and reducing its operating costs.

"We will also focus on preventing and containing credit risks by monitoring key areas such as property and local government debt," he added.

Sheng, CCB's CFO, pointed out that the bank will continue to improve its capital structure by raising the proportion of income-generating assets relative to total assets, while increasing its investments in government bonds to boost profit.

National and local debt plays a role in taxation as these debts' after-tax returns are relatively high, forming favourable support for the bank's profits, Sheng said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.