Adds context in paragraphs 12-13 and 15, HSBC results in paragraphs 16-17, Moody's quote in paragraph 14

By Engen Tham and Selena Li

SHANGHAI/HONG KONG, April 29 (Reuters) - China's Big Five lenders on Tuesday reported narrower margins on their first-quarter earnings and some a drop in profits as the banking sector is hit by a protracted economic slowdown, with rising tariffs darkening prospects further.

As the country's economically crucial property sector continues to reel under a debt crisis, developer defaults are also weighing on the earnings of large Chinese state-owned banks.

"In the first quarter of 2025, the global economy lacked strong growth momentum," said China Construction Bank Corp 601939.SS, 0939.HK in its first-quarter results, where it posted a 4% fall in net profit from a year before.

"The prospects for global trade growth encountered numerous challenges, including rising tariffs."

America and China are locked in a tit-for-tat tariff war which has increased business volatility and reduced trade between the world's two largest economies.

Industrial and Commercial Bank of China (ICBC) 1398.HK 601398.SS, the world's largest lender by assets, and Bank of China 3988.HK 601988.SS posted first-quarter profit drops of 4% and 2.9% respectively from a year before.

All three lenders saw falling margins.

"Growth of micro and small enterprises $(MSE.AU)$ loans is slowing, but remains rapid. We expect the related asset risks to gradually emerge in step with the slowdown of economic growth facing the headwind of tariff shocks," said Nicholas Zhu, an analyst at Moody's.

While China's Bank of Communications (BoCom) 601328.SS, 3328.HK and Agricultural Bank of China (AgBank) 1288.HK 601288.SS logged slight rises in first-quarter net profit of 1.5% and 2.2%, respectively, margins also fell at both lenders.

For all banks, non-performing loan ratios remained either steady or fell slightly. But in the coming months, NPLs across the board are likely to rise, said analysts.

"Asset risks will be high, because of unseasoned risks from financing China's economic transition to high-end manufacturing, technology and clean energy industries," said Zhu.

MORE STIMULUS

Chinese banks' profitability is expected to be further squeezed by potential cuts to key interest rates this year.

Beijing has kept the country's lending rates steady for the sixth successive month, but markets wager more stimulus is likely in coming months to keep growth on an even keel amid an intensifying Sino-U.S. trade war.

"While lower rates might reduce debt servicing costs for borrowers, they would also compress banks' net interest margins, further decreasing profitability," said Zhu.

In March, four of China's largest state-owned banks said they plan to raise a combined 520 billion yuan ($71.60 billion) in private placements from investors, including the finance ministry, after Beijing pledged to help them support the economy.

Asia-focused HSBC HSBA.L on Tuesday warned that loan demand and credit quality could suffer from the broader fallout of U.S. President Donald Trump's global trade war, signalling tougher times for trade-focused banks.

The bank's CEO said there was "a significant drop in volumes along the U.S.-China corridor in the sectors that have not been given a waiver or the reduction of tariffs". He did not elaborate.

($1 = 7.2682 Chinese yuan renminbi)

(Reporting by Engen Tham, Selena Li and Ziyi Tang; Editing by Kirsten Donovan and Jan Harvey)

((Ziyi.Tang@thomsonreuters.com;))