Chinese banks’ net profits dropped a combined 24 per cent during the second quarter, compared with a year earlier as banks grappled with bad loans caused by the coronavirus pandemic. The industry’s net profit stood at 426.7 billion yuan (US$61.4 billion), down from 559 billion yuan during the same period a year ago. Profits were 29 per cent down from the 600 billion yuan recorded in the first quarter , data from the China Banking and Insurance Regulatory Commission (CBIRC) showed Monday. The fall in second-quarter profitability was sharper than expected, said some analysts, caused mainly by banks making higher provisions for loan losses. The industry’s loan loss ratio rose to 3.54 per cent, up 0.04 percentage points from the first quarter. The non-performing loan (NPL) ratio for the industry rose to a 10-year high, at 1.94 per cent, up from 1.91 per cent at the end of the first quarter. The banking sector’s combined bad loans totalled 2.7 trillion yuan , up six quarters in a row. “Due to the impact of the coronavirus on China’s economy earlier this year, we still forecast that [the] NPL ratio will trend higher for the rest of this year, and for the full year it could rise to 2 per cent ,” said Cindy Wang, an analyst at DBS based in Hong Kong. She said, however, that the lower-than-expected profitability was primarily caused by banks’ taking a more conservative approach towards recognising and provisioning for loan losses in the second quarter, as Covid-19 has caused more borrowers to fall behind their loans. Without the pandemic, banks would choose to book higher loan loss provisioning during the fourth quarter. “If the coronavirus continues to stabilise in the second half, and that China would not see further spikes in infections as we go into the winter season, Chinese banks’ profitability should improve going into the second half,” said Wang. China’s second-quarter gross domestic production rose 3.2 per cent year-on-year, higher than expectations, and recovering from the 6.8 per cent contraction seen in the first quarter. Chinese banks have taken an active role in helping the economy recover from the impact of the coronavirus. In June, the central bank and the CBIRC asked banks to extend the grace period of repayment for borrowers to end of March 2021, to address the financial difficulties faced by SMEs and micro-enterprises. The government called on banks to give up as much as 1.5 trillion yuan in profits this year to finance cheap loans, cut fees, defer loan repayments and grant more unsecured loans to help small businesses survive the downturn caused by the coronavirus lockdown. Yi Gang, the governor of the People’s Bank of China, urged financial institutions in June “to sacrifice profits to benefit corporate borrowers, helping reduce their borrowing costs.” The sacrificed profits would be equivalent to roughly 75 per cent of the entire net profit of the commercial banking industry in 2019, based on data from CBIRC. Chinese banks are due to report their first-half results later this month.