Gansu Bank and Jiangxi Bank's latest annual performance shows that under the dual pressure of high interest expenses on time deposits and a continuous decline in loan yields, their interest margins are continuing to narrow.
<h4>Key Points:</h4>
<ul>
<li>The net interest margins of Gansu Bank and Jiangxi Bank are significantly narrowing, mainly due to the need to lower loan rates under policy and market pressures, while still bearing the burden of high-cost time deposits.</li>
<li>Profitability continues to weaken, indicating that these banks may need capital support from state-owned controlling shareholders in the future, which is likely to dilute the interests of other shareholders.</li>
</ul>
Liang Wuren
Gansu Bank Co., Ltd. (2139.HK) and Jiangxi Bank Co., Ltd. (1916.HK) latest annual performance shows that these regional banks, based in relatively weak provinces of the Chinese economy, reflect a bleak picture of a corner of the Chinese financial system.
In the context of generally narrowing interest margins across the banking industry, these small and medium-sized regional banks are the first to be affected. Economic slowdown has led to weak loan demand, coupled with the central bank maintaining a low interest rate environment, which continues to suppress loan yields. Meanwhile, these banks find it difficult to reduce the high costs of deposits. As profitability comes under increasing pressure, external capital support from state-owned shareholders becomes increasingly inevitable, which will further dilute the interests of other shareholders, exacerbating the plight of private investors who have already suffered from shrinking stock prices.
First, looking at Gansu Bank, headquartered in a poverty-stricken area in the northwest, according to its annual report, the bank's new loan scale not only declined last year, but its net interest margin also fell from 1.18% in 2024 to 1.09%, significantly narrowing from 1.65% in 2021. As a result, its main source of income, net interest income, decreased by 4.8% to 4.4 billion yuan (approximately 637 million USD). Although Jiangxi Bank achieved growth in new loans, according to its annual report, the narrowing of its net interest margin was even greater, dropping by more than 0.20 percentage points to 1.41%, dragging down net interest income by nearly 10% year-on-year to 7.7 billion yuan.
Compared to large state-owned national banks or regional banks located in affluent areas, these two banks are structurally more sensitive to interest margin pressures.
Unlike relying on low-cost demand deposit funding pools from large corporate clients and high-frequency trading, the aforementioned banks heavily depend on higher-rate time deposits. This liability structure means higher funding costs, which are difficult to change in the short term.
This phenomenon is likely due to their retail customer structure, where a large number of customers are risk-averse individuals who prefer to exchange limited liquidity for fixed-rate guaranteed returns, rather than keeping funds in demand accounts that yield close to zero but offer more flexibility. Meanwhile, the corporate clients of these banks are mainly small and medium-sized enterprises and local government financing platforms, which typically maintain limited balances in low-interest or interest-free demand accounts or require higher rates for deposits.
Taking Jiangxi Bank as an example, its average interest rate on retail time deposits is 2.61%, accounting for nearly 90% of its total retail deposits, while retail deposits make up slightly more than half of all its deposits. In contrast, the bank's demand deposit interest rate is only 0.06%, which is significantly low. Gansu Bank is in a similar situation and is even more reliant on retail deposits
Compared to demand deposits, time deposits do bring certain advantages to banks, the most important of which is enhancing the stability of funding sources. However, in the current environment of declining loan yields in China, such high-cost liabilities have instead become a heavy drag on profitability. The pressure faced by Bank of Gansu is even more pronounced. In the context of economic slowdown and declining borrower repayment capacity, it is difficult for the bank to issue new loans. Last year, its loan-to-deposit ratio fell to just above 66%, indicating that a significant proportion of deposit funds were not effectively utilized, resulting in cost expenditures without generating income.
<h4>Buffering Losses</h4>
In the face of the aforementioned adverse factors, Bank of Gansu and Jiangxi Bank seem to be trying to maintain their profitability baseline, but the measures they have taken are not particularly prudent, namely reducing provisions for loan losses as a buffer.
Last year, Jiangxi Bank reduced its provisions for credit impairment losses by about 15%, which allowed it to control the decline in net profit to 4%, appearing relatively stable compared to a significant 22% drop in operating income. The decrease in provisions may reflect management's greater confidence in asset quality, as its non-performing loan ratio fell from 2.15% in 2024 to 2.00% last year. However, from the perspective of market skeptics, this move appears to be a more aggressive operation aimed at maintaining profitability.
Although Jiangxi Bank's non-performing loan ratio has decreased, it remains above the average level of large commercial banks. At the same time, its provision coverage ratio is about 160%, lower than the industry average of over 200%. This means that once a wave of defaults triggers risk events, the bank's available risk buffer is relatively limited.
The buffering capacity of Bank of Gansu is even weaker. After reducing provisions, its non-performing loan provision coverage ratio fell to about 131% by the end of last year, a decrease of about 3 percentage points from the previous year. Driven by this operation, even though operating income fell by 9% year-on-year, its net profit still recorded a growth of about 1%.
The bank maintained a non-performing loan ratio of 1.93% last year, but at the same time sold a significant portion of its non-performing assets to an asset management company, which is a subsidiary of one of its major shareholders. This type of &#34;off-balance-sheet&#34; treatment essentially transfers non-performing assets from the listed company to an associated non-listed entity, reminding investors that the data of Chinese banks, especially small and medium-sized banks, often require more cautious interpretation.
Currently, the biggest challenge facing both banks is the continued depletion of capital buffers. In fact, their internal profits have become insufficient to support the capital accumulation required for business expansion. Particularly for Jiangxi Bank, as of the end of December last year, its core Tier 1 capital adequacy ratio (CET1) had fallen below 9%, approaching the regulatory minimum requirement.
If the capital situation continues to deteriorate, these banks will have no choice but to seek capital increases from their controlling shareholders, usually local government-backed institutions, and issue new shares as consideration. This move will dilute the equity of other shareholders.
As a result, the stocks of these two banks have gradually lost favor with investors, with a cumulative decline of nearly 80% in stock prices over the past five years. Currently, Bank of Gansu's price-to-book ratio (P/B) is only 0.11, while Jiangxi Bank's is even lower at 0.08. This means that for every $1 of shareholder equity on their balance sheets, the market is only willing to assign a valuation of about 10 cents, reflecting investors' high skepticism about the true value of their assets and the expectation that non-performing loans will ultimately erode their book value
The price-to-book ratio of most large banks in China is also below 1, for example, Industrial and Commercial Bank of China (1398.HK; 601398.SH) has a listed share price of about 0.47 in Hong Kong, reflecting investors' concerns about the overall banking sector in the current weak economic environment. However, if large banks are under pressure, the situation is even more difficult for smaller banks, especially those located in underdeveloped areas

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The latest annual performance of BANK OF GANSU and JIANGXI BANK shows that both banks' net interest margins have significantly narrowed under the dual pressure of high interest expenses on time deposits and declining loan yields. BANK OF GANSU's net interest margin decreased from 1.65% in 2021 to 1.09%, while JIANGXI BANK's net interest margin fell by more than 0.20 percentage points to 1.41%. This indicates that under the challenges of economic slowdown and low interest rate environment, small and medium-sized regional banks are facing a continuous weakening of profitability, which may require capital support from state-owned controlling shareholders, further diluting the equity of other shareholders

The pressure of narrowing interest margins intensifies, with weak regional banks being the first to bear the brunt