Chinese banks’ second-quarter profits tumble on decade-high bad loans

Chinese banks’ profits fall 24 per cent in second quarter, as provisions rise for sour loans

Non-performing loans rose to 1.94 per cent, a decade high, as borrowers’ struggle to repay amid coronavirus pandemic

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Skyline of the central business district from a park in Beijing on May 23. Photo: AFP

Published: 3:00pm, 11 Aug 2020Updated: 9:40pm, 11 Aug 2020

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.