Beijing — China’s biggest banks responded to government demands to help spur a slowing economy. The cost of their efforts has been disappointing profits and shrinking loan margins.

Repeated calls by policy makers for banks to advance more credit to the struggling private sector and small businesses have taken a toll on the industry’s financial performance in 2019. This week, China Construction Bank and Bank of Communications posted weaker-than-expected first-half profits as lending margins declined.

On Thursday, Industrial and Commercial Bank of China (ICBC) said its profit was up 4.7% to 167.9-billion yuan ($23.5bn), matching analyst estimates, according to a survey conducted by Bloomberg. Net interest margin at the world’s biggest lender narrowed to 2.29% from 2.30% a year earlier.

Net fee and commission income grew 11.7% in the first half to 88.5-billion yuan from 79.3-billion on the strength of the bank’s card business, it said.

In response to government requirements, the big banks increased loans to small businesses by 35% in the first six months, while cutting their financing costs by more than the one percentage point authorities wanted, according to the industry regulator.

Margin pressure

ICBC, which is the country’s largest bank, is facing pressure on its net interest margin, president Gu Shu said on Thursday. China Construction Bank’s margin may drop by one or two basis points in the second half, CFO Xu Yiming said at a briefing in Beijing on Thursday.

“What’s going to end up in the medium and longer term is you’re still going to have the margin pressure from the mispricing of risk,” Grace Wu, a senior director at Fitch Ratings, said in a Bloomberg Television interview on Thursday. “Ultimately, that’s going to have asset quality pressure down the road.”

The pressures will only increase, analysts have said, after China’s central bank changed how it calculates the nation’s one-year benchmark rate. While the effort is intended to liberalise interest rates and ease borrowers’ financing costs, net interest margins across the industry will be squeezed by the reform, Postal Savings Bank of China said last week.

While the moves are likely to win political points for the firms, offering loans to riskier companies at lower rates has raised concerns, and investors have never been so downbeat. The MSCI China banks index underperformed the MSCI China index by about 13% this year as valuations of mainland lenders approach historic lows.

Changes to how China sets the one-year benchmark were first used on August 20. Most of the impact will surface and hit banks’ profit in 2020, according to Citigroup analysts.

Shanghai-based Bocom, which saw its margin narrow by three basis points quarter-on-quarter, said on Tuesday that switching to the new benchmark rates will lead to slight decline in loan pricing. The bank will rein in its own funding costs to keep margins stable in the second half, it said.

Analyst Francis Chan said that combined profit at the nation’s four biggest state-run lenders was predicted to grow by 2.6% to 964-billion yuan in 2019, according to consensus estimates in a Bloomberg survey, the slowest since 2016.

Citigroup analysts led by Judy Zhang said, “Overall, we see China banks’ share performance to continue to be overshadowed by non-performing loan and net interest margin concerns in light of dual track interest rate reform and zombie loan clean-up initiatives.”