Bond investment returns showed notable growth.

As the earnings season for listed banks concludes, the operating conditions of state-owned major banks have come to light.

Overall, major banks experienced reduced downward pressure on performance in the first half of this year, with earnings conferences revealing optimistic expectations for net interest margin stabilization. Meanwhile, investment returns and intermediate income significantly enhanced their support for performance, with non-interest income emerging as a bright spot. However, the provision reversal effect that had persisted for some time continued to weaken.

Financial reports showed that the six major banks collectively achieved operating revenue of 1.83 trillion yuan in the first half, compared to approximately 1.8 trillion yuan in the same period last year. They recorded net profit attributable to shareholders of 682.524 billion yuan, versus approximately 683.388 billion yuan in the same period last year. All six major banks achieved positive year-on-year revenue growth, while three banks posted positive growth in net profit attributable to shareholders and three posted negative growth, representing a significant improvement compared to the same period last year.

**Main Profit Drag Factors: Declining Interest Income and Rising Provision Charges**

Overall, major banks showed marked improvement in downward pressure on performance compared to last year, though the situation of increasing revenue without increasing profit persists.

In terms of revenue, all six major banks achieved positive year-on-year growth, with Bank of China (3.76%), CCB (2.15%), and ICBC (1.57%) leading in growth rates. In contrast, five major banks recorded negative year-on-year revenue growth in the first half of last year.

Regarding net profit attributable to shareholders, three major banks achieved positive year-on-year growth, with Agricultural Bank of China continuing to lead with 2.66% growth, while Bank of Communications and Postal Savings Bank of China recorded growth rates of 1.61% and 0.85% respectively. During the same period, ICBC, CCB, and Bank of China saw their net profits attributable to shareholders decrease by 1.39%, 1.37%, and 0.85% respectively compared to last year. In the same period last year, only Agricultural Bank of China achieved positive growth in net profit attributable to shareholders.

Interest income remains banks' core revenue source, but net interest margins have continued declining in recent years, creating significant pressure for interest-earning assets like loans to "compensate for price with volume," resulting in a clear downward trend in related income. In the first half of this year, the six major banks achieved net interest income of 1.32 trillion yuan, down approximately 2% from the same period last year.

Among them, except for Bank of Communications, which saw a 1.2% year-on-year increase in net interest income in the first half, all other major banks experienced varying degrees of decline in net interest income year-on-year. Bank of China's net interest income fell 5.27% year-on-year in the first half, while CCB, Agricultural Bank of China, and Postal Savings Bank of China also declined by 3.16%, 2.88%, and 2.67% respectively.

From the deposit and loan perspective, the main reason for declining net interest income remains that the negative drag from falling loan yields outweighs the positive pull from declining deposit rates, keeping net interest margins in a downward channel. Taking Bank of China as an example, the bank's loan interest income decreased by 39.665 billion yuan year-on-year in the first half, a decline of 10.47%, while deposit interest expenses decreased by 25.851 billion yuan year-on-year, down 10.94%.

Among other profit drag factors, the provision reversal effect showed significant decline. In the first half, the six major banks collectively set aside approximately 422.7 billion yuan in impairment provisions, an increase of about 22 billion yuan year-on-year. Previously, major banks' provision charges had shown a declining trend for consecutive years, providing important support for performance.

Specifically, in the first half of this year, CCB, Postal Savings Bank of China, and ICBC increased their provision charges to varying degrees, with Postal Savings Bank of China and CCB seeing impairment provision scales surge 34.62% and 22.85% year-on-year respectively, corresponding to increases of approximately 5.9 billion yuan and 20 billion yuan.

Regarding the increased provision charges, CCB mentioned that impairment losses on loans and advances increased by 29.025 billion yuan compared to the same period last year, while some impairment losses on financial investments were reversed. Postal Savings Bank of China also mainly saw significant year-on-year increases in credit impairment losses, with loan impairment losses of approximately 23 billion yuan, up 7.3 billion yuan year-on-year, growing 46.55%. The bank explained this was mainly due to actively serving the real economy with loan portfolio growth, and adhering to prudent risk management policies by strengthening provision charges.

**Investment Returns + Intermediate Income Recovery as Substitutes**

Looking at the main supporting factors for improved performance, contributions from investment interest income and non-interest income increased.

Investment interest income is another important source of bank interest income. In the first half of this year, except for Postal Savings Bank of China, major banks increased their bond investment scales to varying degrees, driving growth in bond investment interest income, though declining bond market yields provided some offsetting effect.

Except for Bank of Communications and Bank of China, other major banks generally saw substantial growth in investment returns under the non-interest income category.

For example, ICBC's average investment balance grew 21.6% in the first half, but the average yield decline of 39 basis points partially offset the impact of scale growth, ultimately achieving investment interest income of 190.567 billion yuan, up 11.657 billion yuan year-on-year, growing 6.5%. Among non-interest income, investment returns surged 52%.

Agricultural Bank of China achieved bond investment interest income of 182.115 billion yuan in the first half, up 5.415 billion yuan year-on-year; among other non-interest income, investment returns surged 53%. Bank of China's financial investment interest income reached 115.527 billion yuan, growing 8.93% year-on-year; benefiting from foreign exchange gains, precious metal sales income, and fair value change gains, other non-interest income grew 42% year-on-year. CCB's financial investment interest income was 150.146 billion yuan, growing 4.65% compared to the same period last year. Among non-interest income, due to increased bond investment and equity investment disposal gains year-on-year, investment returns surged 217% in the first half.

In early August, the Ministry of Finance and State Administration of Taxation issued a notice to resume collection of value-added tax on interest income from government bonds, local bonds, financial bonds, etc., starting August 8, adopting a "new-old demarcation" principle. As major bond market investors, banks' exposure to the new policy's impact has drawn significant market attention.

Regarding this, CCB Vice President Ji Zhihong stated at the interim results conference that the bank's bond investment portfolio would be affected neutrally by this tax reform. He further pointed out that tax rate adjustments are generally favorable for valuations of existing bonds, particularly government bonds. With government bonds accounting for nearly 80% of CCB's investment portfolio, the value of these high-quality assets is further highlighted after the tax reform. Going forward, the bank will adopt more refined investment strategies than before the tax reform, combining macroeconomic policies and major asset class trends to continuously optimize the investment portfolio structure.

Another performance supporting factor for major banks in the first half was the recovery in fee and commission income. Data shows that four major banks achieved positive year-on-year growth in net fee and commission income in the first half, with Postal Savings Bank of China and Agricultural Bank of China posting growth rates exceeding 10%, and Bank of China also growing over 9%. ICBC and Bank of Communications saw significantly narrowed year-on-year declines in net fee and commission income.

Looking back at the first half of 2024, affected by market volatility, declining investor risk appetite, and quote-to-execution policies, major banks' net fee and commission income declined nearly 10% overall, with Postal Savings Bank of China, Bank of Communications, and CCB all posting double-digit declines in related income.

**When Will Net Interest Margins Stabilize? Management Provides Judgment**

Bank net interest margin trends remain one of the market's most closely watched topics. In the first half of this year, the six major banks' net interest margins continued their downward trend, but the decline magnitude showed marginal narrowing tendencies both year-on-year and quarter-on-quarter.

Compared to the full year last year, five of the six major banks in the first half saw net interest margin declines exceeding 10 basis points, though the main declines occurred in the first quarter when repricing was intensive, with each major bank's single-quarter net interest margin decline in the second quarter not exceeding 3 basis points.

Compared to the same period last year, the four major banks - ICBC, Agricultural Bank of China, Bank of China, and CCB - all saw varying degrees of narrowing in net interest margin declines. Postal Savings Bank of China had the largest net interest margin decline in the first half of this year at 17 basis points, but the bank's net interest margin remains the highest among major banks (1.7%). Among other major banks, the highest net interest margin is currently 1.4% (CCB) and the lowest is 1.21% (Bank of Communications).

Regarding continued net interest margin declines, multiple major banks mentioned reasons including LPR (Loan Prime Rate) cuts, existing mortgage rate adjustments, changes in deposit term structure, and foreign currency rate cuts and lagged deposit rate adjustments in the first half.

Looking ahead to the second half, management at multiple major banks expressed optimistic expectations at interim results conferences. Overall, both deposit and loan pricing still have room for decline in the second half, but considering each bank's continuous adjustments on both asset and liability sides, the trend of narrowing net interest margin declines is expected to continue.

"We have firm confidence in the trend of marginal stabilization of net interest margins in the future," said ICBC Vice President Yao Mingde at the results conference, expecting that net interest margin declines will remain an industry commonality in the second half, but the magnitude will further narrow. Benefiting from comprehensive judgment and effective asset-liability management measures taken accordingly, the bank's stabilizing trend of narrowed net interest margin declines year-on-year in the first half has sustainability.

Agricultural Bank of China President Wang Zhiheng also believes that the bank's net interest margin is expected to achieve marginal stabilization in the second half of this year. On the asset side, the LPR decline in the first half will further drive existing loan repricing, and loan yields still face downward pressure, but a series of measures taken by the bank are expected to stabilize loan yields; on the liability side, as deposits gradually mature and reprice, the efficiency of the market-oriented deposit rate adjustment mechanism will continue to be released, and interbank liability costs will also follow policy rates further downward.

CCB Chief Financial Officer Sheng Liurong believes that whether LPR cuts or deposit rate cuts, there are lagged impacts. Since loan pricing is relatively faster than deposits, there is still some downward pressure in the future. "Overall, the net interest margin decline will narrow quarter by quarter, and we have confidence to maintain the leading level among comparable peers through proactive management," Sheng Liurong said.

Bank of China President Zhang Hui stated that looking ahead to the second half, from the external market perspective, the domestic banking industry as a whole faces a low interest rate environment, with rising expectations for US dollar rate cuts, and the banking industry's net interest margins will still face some narrowing pressure. Bank of China will strive to stabilize net interest margins through continuously strengthening deposit and loan management, increasing foreign currency bond investment efforts, and leveraging globalization advantages.

"Regarding whether net interest margins have bottomed out, we still need to observe market interest rate trends going forward. If market rates maintain good levels, we can maintain good net interest margin levels through our own refined management," said Postal Savings Bank of China President Liu Jianjun.

"After deposit benchmark rate cuts, the repricing effect of related time deposits will gradually emerge. If we don't consider new LPR cuts, the later it gets, the more favorable it will be for net interest margin stability," said Bank of Communications Vice President Zhou Wanfu, noting that due to continued impact from policy factors such as existing mortgage rate adjustments, plus weak effective demand and intense peer competition, effective asset deployment faces pressure, and asset-side yields are expected to continue declining. Liability-side rates will decline more as time goes on, and net interest margin declines are expected to gradually narrow.