Chinese banks brace for cost of national service to shore up economy as debt reprieve, soured loans erode earnings
- Lenders have been asked to sacrifice profits, extend debt reprieve to businesses, and hire new graduates to ease unemployment
- Banks are expected to report weaker second-quarter earnings due to the lingering effects of coronavirus as bad loans accumulate
The first-half earnings reports, starting from August 28, will showcase the extent of damage to each Chinese banking group as bad loans reached the highest in a decade. State-mandated forbearance measures to help small businesses weather the crisis, could have also undermined their profitability.
“I wouldn’t be surprised if some of the banks’ net profit declined by as much as 20 per cent in the second quarter” versus a 4-5 per cent growth rate in the first, said Terry Sun, a banking analyst at CMB International Securities. “We believe Chinese banks could be kitchen-sinking amid Covid-19 shock” or front-loading the bad news at the earliest chance, he added.
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Chinese banks’ net profits fell 24 per cent during the second quarter compared with a year earlier, the commission said earlier this month.
Cindy Wang, an analyst at DBS Bank based in Hong Kong said banks would typically choose to delay loan loss provisions until the fourth quarter. But the pandemic has changed the balance of things.
“The lower-than-expected profitability was primarily caused by banks’ taking a more conservative approach towards recognising and making provision for loan losses in the second quarter, as Covid-19 has caused more borrowers to fall behind their loans,” she added.
China calls on banks to give up US$212 billion in profits to finance cheap business lending
The central government in June called on banks to sacrifice as much as 1.5 trillion yuan (US$212 billion) in profits this year to finance cheap loans, trim fees, defer loan repayments and grant more unsecured credit lines to help businesses survive the downturn.
The move came after the central bank and the commission notified banks in the same month to extend the grace period of loan repayments by nine months to the end of March 2021 to help ease the credit crunch among small businesses.
Chinese banks’ second-quarter profits tumble on decade-high bad loans
These concessions are expected to erode banks’ net interest margin, which stood at 2.09 per cent at the end of June. The margin has been narrowing from 2.2 per cent in December 2019.
While China’s gross domestic product has recovered somewhat from the historic slump of 6.8 per cent in the first quarter, the economy has continued to suffer from the ill effects of the Covid-19 crisis.
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State-controlled commercial banks including Agricultural Bank of China, Bank of Communications, China Construction Bank, Industrial and Commercial Bank of China and Postal Savings Bank of China are likely to report higher loan loss provisioning, analysts said.
“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,” said Wang of DBS. “For the full year it could rise to 2 per cent.”
