BEIJING/SHANGHAI/HONG KONG, Aug 30 (Reuters) – Two of China’s biggest banks on Wednesday posted sluggish profit growth as the economy struggles to bounce back after the lifting of pandemic restrictions, with one saying local government financing vehicles (LGFV) had defaulted, hitting asset quality.

Industrial and Commercial Bank of China Ltd (ICBC) (601398.SS), the country’s biggest lender, and Bank of China (BoC) (601988.SS) posted in exchange filings first half profit growth of 1.2% and 0.78%, respectively, from a year earlier.

Chinese lenders are battling headwinds such as lower lending rates and pressure from the government to prop up the economy – which has been buffeted by weak demand both at home and abroad – as well as bad debts related to property developers and LGFVs.

“Some regional financing platforms that are weak in fiscal backing, have experienced a series of risk events, including defaults,” said Liu Jiandong, BOC’s chief risk officer in a post-results press conference.

“There are some regional risks that have begun to emerge,” Liu said, adding that asset quality has declined slightly but remains under control.

Both lenders posted a shrinking net interest margin (NIM) – a key gauge of profitability – for the first half of this year, a sign that lenders are under pressure to expand credit support to the struggling economy.

ICBC’s NIM stood at 1.72% at the end of June, down from 1.77% at the end of March. BoC’s NIM narrowed to 1.67% at end-June from 1.7% at end-March.

ICBC said it did not distribute dividends on preference shares in the first half.

“Chinese banks are likely to continue to face earnings pressure from margin compression,” said Ming Tan, director at S&P Global Ratings.

Household and business confidence, which has plunged, will be the biggest challenge for the banking sector in the second half of the year, as this will affect loan demand, pricing and margins, said Tan.

ICBC’s non-performing loan (NPL) ratio stood at 1.36% at the end of June, compared with 1.38% at the end of March, while BoC’s was 1.28% at end-June, up from 1.18% at end-March.

BoC officials speaking at the press conference said the bank’s mortgage NPL ratio rose 0.02 percentage points to 0.49% in the first half, but there was no material deterioration in mortgage asset quality although it was coming under pressure.

($1 = 7.2543 Chinese yuan renminbi)

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