(Yicai) April 25 -- Investments are becoming an increasingly important form of revenue for Chinese listed banks as net interest margins, which are the difference between the amount of money a bank earns on loans and the amount it pays on deposits, continue to contract. However, as bond prices tumble this year, this could also expose the banks to greater risks, financial experts said.

Twenty-six out of the 28 lenders to have released their annual reports so far posted an uptick in returns from their investments in 2024. Only two logged a loss. 

Of these 26 banks, the top three were all small rural commercial banks. Rural Commercial Bank of Zhangjiagang posted the fastest growth at 176.8 percent year on year, while Ruifeng Bank, also in the highly economically developed Yangtze River Delta, logged 100.5 percent. They were closely followed by Chongqing Rural Commercial Bank in the southwest of the country with a 93.5 percent increase. 

Among the big banks, Bank of China reported a 64.6 percent jump in investment income last year from the year before, Ping An Bank logged a 53.2 percent increase and China Merchants Bank posted a 34.7 percent gain. All three ranked in the top ten for investment income growth in 2024, with China Merchants Bank coming in 10th.

For many banks, investment income contributed significantly to their annual operating income. For example, 27.3 percent of the Rural Commercial Bank of Zhangjiagang’s revenue of CNY4.7 billion (USD644.8 million) came from investments last year.

Bull Market

The bond market was a bull market for a long time, and this is an important factor behind banks’ growth in investment income. Several lenders reported in their annual reports that there was a big jump in investment income due to higher returns from bond investments or larger bond trading volumes.

“In the face of slower economic growth and industrial restructuring, small and medium-sized banks, which are under pressure from rising debt costs and shrinking net interest margins, have managed to earn relatively high returns by investing in bonds,” the person in charge of the financial markets department of a rural commercial bank in the Yangtze River Delta region told Yicai.

For example, Chongqing Rural Commercial Bank‘s gains from investments and changes in fair value more than doubled last year from the year before to CNY3.8 billion (USD521.3 million), according to its annual report. The fast growth in income was thanks to smart trading strategies and more diverse investments, it said.

Greater Risk

However, as banks increase their exposure to the securities market, their earnings become more vulnerable to market swings. Since the start of the year, bond prices have tumbled and yields have gone up. For instance, the yield on the 10-year treasury bond has climbed around 30 basis points from a low of 1.6 percent at the beginning of the year to 1.9 percent now.

This trend is already being reflected in the first-quarter and 2025 performance projection reports of listed banks. For instance, Ping An Bank reported a fair value loss of CNY3.08 billion (USD422.5 million) in the first three months, compared with the CNY1.5 billion (USD215.6 million) gain from the same period last year.

Due to the correction of bond prices, banks that bought at high price earlier in the year are now sitting on significant paper losses, said Tan Yiming, chief fixed income analyst at Minsheng Securities, With more market volatility, it becomes more difficult to make money through bond trading. 

“In the short term, listed banks can still boost revenue by selling bonds they hold that are still profitable,” said Lin Yingqi, an analyst at China International Capital Corporation. “But if the bond market continues to fluctuate, this will have an inevitable impact on banks’ performance.”

Editors: Tang Shihua, Kim Taylor