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China's largest banks weather property woes but margins narrow

BEIJING (Reuters) - China's largest lenders have posted third-quarter profit rises of more than 4% as their diverse lending portfolios kept them above the fray of property market woes.

But banks mostly logged shrinking net interest margins - a key gauge of bank profitability - in a sign that loan demand is weak as the world's second-largest economy slows.

Industrial and Commercial Bank of China Ltd (ICBC), the world's largest commercial lender by assets, said net profit rose 6.8% year-on-year in the third quarter in a Friday filing.

Agricultural Bank of China Ltd (AgBank), Bank of Communications Co Ltd (BoCom) and Bank of China Ltd (BOC) followed suit with net profit up 6.4%, 6.7% and 4.83%, respectively.

China Construction Bank (CCB) led the pack with net profit growth of 8.61%.

The diversity of China's largest bank portfolios has insulated them against the turmoil in the property market, which has seen loan defaults mount and cash-flow issues continue to dog the industry.

"Big state-owned banks’ lending to property developers accounts for 3%-7% of their total loans ... a proportion lower than small and medium-sized lenders," said Vivian Xue, director of financial institutions at Fitch Ratings, referring to the position at the end of the first half.

"And the big banks mainly lend to state-owned or high-quality developers," Xue added.

MARGINS

However, most of the lenders logged a squeeze on net interest margins (NIMs).

ICBC's NIM fell to 1.98% at the end of September compared with 2.03% at the end of the prior quarter. AgBank and BoCom also saw a small fall over the same period, to 1.96% from 2.02% and 1.50% from 1.53% respectively. CCB's slid to 2.05% from 2.09%.

BoC bucked the trend with a slight uptick from 1.76% at the end of June to 1.77% at the end of September.

China's third-quarter GDP data showed domestic demand waned towards the end of the quarter as a flare-up in coronavirus cases led to lockdowns, while export growth slowed and the key property sector further cooled, pointing to a fraught recovery.

“As overall credit demand remained weak, Chinese banks have to lower loan-interest rates to lend out money, posing pressure on their net interest margins,” said Michael Zeng, a banking analyst at Daiwa Capital Markets.

Zeng expects the sector's NIM to further narrow in the fourth quarter.

Four lenders posted slight falls in non-performing loan ratios in the third quarter. Both ICBC and AgBank posted NPL ratios of 1.4% for the end of September compared with 1.41% at the end of the quarter before.

Meanwhile, BoCom's NPL ratio fell to 1.41% at the end of September from 1.46 at the end of June, while BoC's fell to 1.31% from 1.34% over the same period. CCB's held steady at 1.4%.

(Reporting by Ziyi Tang in Beijing and Engen Tham in Shanghai; Editing by Ana Nicolaci da Costa and David Holmes)