Recent disclosures of annual reports from various publicly listed banks have unveiled a persistent challenge within the financial sector: the narrowing of net interest margins (NIM). This critical metric, which gauges the profitability of banks by comparing the interest earned on loans to the interest paid on deposits, has been declining steadily over the past three yearsDuring the annual performance briefings, management teams from different commercial banks shared their insights and strategies aimed at stabilizing this vital indicator, recognizing its fundamental role in ensuring long-term growth and sustainability in organizational performance.

Stabilizing net interest margins is no easy task, as it requires banks to manage not only their funding costs but also enhance the quality of assets they holdAdditionally, it involves refining their overall financial services to better serve clients and improving the composition of their balance sheets

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For banks, maintaining robust asset quality is particularly crucialWhen examining the market performance of listed banks over the last decade, one clear takeaway is that high profit levels have traditionally characterized the banking sectorInvestors and market analysts often scrutinize banks’ financial statements closely, focusing on profit marginsWhile this focus is valid, it is essential to understand that profits stem from the quality of a bank’s assetsIf a bank fails to scrutinize and mitigate high-risk assets or does not focus on maintaining a base of quality long-term assets, short-term profits reflected in quarterly reports may conceal underlying vulnerabilities.

Furthermore, banks must closely monitor various metrics related to loan performance, such as the ratio of watchlist loans, overdue loans, and non-performing loansThey should also analyze the coverage ratio for loan provisions and keep an eye on the "spread" between overdue loans and non-performing loans

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Early detection and prompt management of potential risks are critical to sustaining sound operations.

In addition to enhancing asset quality, banks are also looking to improve their comprehensive financial services capabilities, which can contribute significantly to their revenue streamsThese services promote customer retention, which is essential for both corporate and retail bankingA loyal customer base translates to steady incomeMoreover, expanding in the realm of intermediary services can provide additional income sources—this includes ventures into third-party payments and credit card services, which have been shown to enhance operational revenue potentialLarge-scale lending operations, international settlements, and bond underwriting also have the capacity to bolster banks' profit margins by increasing transaction volumes.

It is worth noting that while banks have the option of lowering deposit interest rates as a direct means to stabilize NIM, such a strategy must be approached with caution

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The timing, magnitude, and impact of any adjustments must be considered meticulouslyIn today's transparent financial management landscape, banks face heightened competition not just from each other, but also from insurance companies, investment funds, and various securities firmsA substantial outflow of low-cost deposits could severely impact a bank’s foundational credit operationsTherefore, banks must enhance their internal management of deposit costs, seeking to reduce reliance on high-cost deposits—like fixed-term structured deposits—while simultaneously increasing offerings in personal mortgage and consumer loansBy optimizing both sides of the balance sheet, banks can better marginalize their NIM.