Investment income at China’s regional banks rises even as lending falls By Reuters

SHANGHAI (Reuters) – Several regional Chinese banks reported a rise in their investment income in the first half of the year, even as their core lending businesses faltered, as a sagging economy and sluggish money transmission forces banks to trade bonds.

WHY IT’S IMPORTANT

Chinese lenders continue to face challenges such as tight margins and low lending rates, despite Beijing’s efforts to revive the economy amid a housing crisis and sluggish consumption.

Rural commercial banks, whose role is to lend money to support small businesses, are now putting more money into trading bonds and other financial assets, a sign that lenders are moving away from their original mandate.

Funds and retail investors also rushed to the safety of bonds, prompting warnings from authorities of a bubble in that market.

BY NUMBERS

Suzhou Rural Commercial Bank and Zhangjiagang Rural Commercial Bank saw investment income rise 116 percent and 176 percent respectively in the first half of the year compared to the same period last year, according to their financial statements. In contrast, net interest income – the primary source of income – fell by 7% and 12% respectively.

Investment income now accounts for about 30% of total income for both banks, up sharply from the low-teens in 2021.

Bank statements indicate that the main driver behind this increase in investment income is the disposal of debt investments and financial assets held for trading purposes.

KEY QUOTE

Rural commercial banks, especially those in economically weaker regions, face more significant challenges in terms of asset quality and profitability, said Elaine Xu, director of financial institution Asia-Pacific at Fitch Ratings.

Loan growth for many of these banks has slowed considerably this year due to reduced loan demand and increased competition from larger banks, which increasingly dominate lending to small micro-enterprises, Xu said.

The challenges have pushed some of them to take a more aggressive stance in investment trading to counter the continued tightening of net interest margins, Xu said.