(Yicai) Nov. 20 -- Net interest margins at Chinese commercial banks held steady in the third quarter following a protracted decline, even as both the balance and share of non-performing loans ticked higher.

Net interest margin -- the difference between the interest a bank earns on its loans and investments and the interest it pays on deposits and other funding -- was 1.42 percent at the end of the September quarter, unchanged from the end of the second quarter, according to the latest information from the National Financial Regulatory Administration.

Behind the stabilization is a combination of cost control on the liability side and structural optimization, said Dong Ximiao, deputy director of the Shanghai Institute for Finance and Development. May’s deposit rate cuts largely offset the impact of the loan prime rate cut, while interest rate and reserve requirement cuts eased bank funding costs, he added.

Regulatory action against unhealthy competition has also guided banks to optimize pricing and lower liability costs, Dong said.

The NPL balance at banks rose by CNY88.3 billion (USD12.4 billion) to CNY3.5 trillion (USD491.8 billion) as of Sept. 30 from June 30, while the bad loan ratio widened to 1.52 percent from 1.49 percent, according to the NFRA’s data.

This was accompanied by a decline in provision coverage to 207.15 percent from 211.97 percent, indicating ongoing risks in certain sectors and continued pressure on bank asset quality.

The increases are mainly down to two factors, according to Dong. First, retail lending risks, with personal consumption loans, business loans, and credit card overdrafts accounting for a big share of sour retail loans.Second, real estate sector risks persist, particularly in development loans, which have seen rising NPL ratios.

Looking Ahead

Stricter regulation of bank pricing behavior and the delayed effects of May’s deposit rate cuts will support stability, with net interest margin expected to remain broadly unchanged for the rest of the year, said Wang Yifeng, an analyst at Everbright Securities, said about the future trend of net interest margin.

But weak effective credit demand, local government debt swaps reducing asset returns, and next year’s loan repricing will continue to pressure margins, Dong noted, adding that short-term stabilization does not alter the long-term downward trend.

Dong said that in this half of the year, NPL disposal will continue to focus on personal lending, with continued efforts around consumption loans, credit cards, and business loans. Attention should also be paid to real estate loans and export-related industries and enterprises affected by tariff policies, he noted.

Against the backdrop of insufficient demand and cutthroat competition, the structural differentiation within the banking industry continues to intensify.

As of Sept. 30, the total assets of large state-owned banks jumped 10 percent from a year ago, more than double the 4.7 percent growth logged at joint-stock banks, according to NFRA data. Moreover, big state banks accounted for 44 percent of total banking sector assets, up 1.2 percentage point from the same period of last year.

This is putting pressure on joint-stock and smaller banks, narrowing their room for survival, and prompting industry insiders to call for tougher regulatory action against unhealthy competition.

Editor: Futura Costaglione