Bank Profitability Under Pressure

Last week, the banking sector began to publicize its first-quarter performance. In fact, some banks already held their annual shareholders' meeting. Although they are still optimistic of improved performance in this year's second half, the poor first-quarter results throw some doubt on whether the banking sector's recovery will actually take place this year.

In January 2016, data showed bank credit growing at just 10 percent from a year ago. With sluggish credit growth, the banks have been aggressively lowering their deposit faster than their loan rates. This explains the rise in the sector's net interest margin (NIM or the difference between deposit and loan interest rates) to 5.6 percent in January this year from 4.2 percent last year. However, this was not enough to cover the rising cost of non-performing loans (NPLs), due to slower economic growth. Sector-wide NPLs rose to 2.7 percent in January this year from 2.4 percent last year, while the sector's profitability dropped 5 percent over the same period. The worry is how far last year's weak growth will extend into 2016.