Growth Dragons Weekly: China Banks Revive Interim Dividends, Largest Broker and Largest Shipbuilder Mergers

What happened in China this week:

1. China Banks Revive Interim Dividends Despite Fall in Earnings

2. Guotai Junan Merges with Haitong Securities To Form the Largest Broker in China

3. Merger to Create the World’s Largest Listed Shipbuilder Controlling 33% of Global Civil Ship Orders

4. NIO’s Revenue Jumps 99%, Launches Mass Market Onvo Brand

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#1 China Banks Revive Interim Dividends Despite Fall in Earnings

Industrial & Commercial Bank of China (ICBC), the world’s largest bank by assets, reported a decrease in net profit for H1 2024. This decline was primarily driven by a reduction in net interest income from lending, amid falling interest rates in China, the world's second-largest economy. Net interest income dropped by 6.8% to 313.95 billion yuan, while net profit fell by 1.9% to 166.805 billion yuan year on year. Additionally, net fee and commission income saw an 8.2% decline, amounting to 67.405 billion yuan.

Overall, all key income-generating components of ICBC experienced a year-on-year decline. This trend mirrors challenges faced by other major Chinese banks, including Bank of China (BOC), Bank of Communications (BoComm), Agricultural Bank of China (ABC), and China Merchants Bank (CMB), as detailed in the table below.

The table highlights a drop in net interest income and profit growth across these banks. While BoComm and ABC posted marginal growth in net interest income and profits, respectively, their performance was not particularly remarkable, aligning with the broader trend among peers.

All five banks reported a decline in their net interest margins (NIM), a predictable outcome given China’s ongoing interest rate reductions. NIM is likely to continue falling in the short term together with falling interest rates.

On a more positive note, all the banks have marginally reduced their non-performing loan (NPL) ratios, reflecting a more conservative approach that is crucial in the current economic climate.

Additionally, all five banks have increased their capital adequacy ratios, indicating a stronger buffer against potential NPL risks. Their cash reserves have also risen compared to a year ago, suggesting a focus on defensive positions as income declines.

In terms of lending, the banks are increasingly focusing on private businesses and consumer loans. For instance, BOC’s loans to private enterprises grew by 9.35% to 348 billion yuan, alongside increased lending in consumer loans and credit card receivables.

Despite recent pullbacks, all five banks’ share prices remain positive for the year, with Bank of China leading with a 23% year-to-date gain. The rest are also enjoying double-digit percentage increases.

This suggests that the worst may be over, but a full recovery in stock prices remains elusive, as Chinese banks continue to face significant headwinds such as slower consumption, sluggish economic growth, ongoing property market challenges, and falling interest rates.

That said, these banks have announced their first interim dividends after many years, despite faltering profit growth. Looking ahead, further interest rate cuts in China are expected, which will likely place additional pressure on the banks’ net interest margins (NIM) and profitability. However, their ability to distribute dividends should remain stable, with an average payout ratio of around 30%, providing a sufficient buffer to absorb any decline in profitability.

#2 Guotai Junan Merges with Haitong Securities To Form the Largest Broker in China