China’s top banks swamped by wave of Covid-19 related bad loans see pandemic casting shadow on full-year profits

Senior Chinese bank officials expect more bad loan provisioning to come, resulting in further pressure on net profit for the full year
The mainland’s five leading commercial banks reported their maiden decline in profitability since the global financial crisis

China economy

Georgina Leein Hong KongandDaniel Renin Shanghai

Published: 9:30am, 1 Sep 2020

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Top executives of China’s leading state-owned banks dampened hopes of a quick recovery, saying they expect their second-half net profits to continue to be weighed down by mounting sour loans despite the economy making a steady recovery from the coronavirus pandemic.

The mainland’s five leading commercial banks reported their maiden decline in profitability since the global financial crisis, which was due primarily to higher provisioning for bad loans. This is despite China’s gross domestic product rebounding 3.2 per cent in the second quarter, from the 6.8 per cent contraction seen in the first quarter.

Analysts expect Chinese banks’ profitability to come under pressure for a variety of reasons, ranging from weak consumer sentiment to geopolitical tensions. The stock markets in Hong Kong and the mainland fell on Monday amid concerns over banks’ outlook.

“The coronavirus is the biggest black swan [the banking sector has seen],” Jin Yanmin, chief risk officer at China Construction Bank, said during the bank’s results briefing on Monday. “As the global economy is in the middle of an adjustment, going forward [more] non-performing loans will be reported next year” as the government and central bank end economic stimulus measures, affecting corporate borrowers further.

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China Construction Bank reported a net profit of 137.63 billion yuan, a 10.7 per cent from 154.19 billion yuan a year ago.

Loan loss provisioning rose 49 per cent from a year ago to 111.38 billion yuan. CCB’s non-performing loan ratio rose to 1.49 per cent from 1.42 per cent at the end of December.

First half net profit at Agricultural Bank of China dropped 10.4 per cent to 108.83 billion yuan, from 121.45 billion yuan.

The bank’s president Zhang Qingsong quashed any expectations of a quick rebound, saying that the lender plans to stringently increase loan-loss provisioning during the second half. “In a complicated external environment, combined with measures to counter the impact from the pandemic, it’s inevitable that our net profit would be pressured,” he said.

Agricultural Bank of China’s loan loss provision during the first half rose 35 per cent, reaching 99.12 billion yuan from 73.48 billion yuan a year ago.

Bank of Communications’ net profit dropped 14.6 per cent to 36.51 billion yuan, from 42.75 billion yuan. Its NPL ratio rose to 1.68 per cent, from 1.47 per cent at the end of December.

Industrial and Commercial Bank of China, the world’s largest lender by assets, earned 148.8 billion yuan in the first half, down 11.4 per cent on year. The bank’s NPL ratio rose to 1.5 per cent by the end of June, compared to 1.43 per cent three months earlier.

China’s top banks, including China Construction Bank, have increased bad loan provisions. Photo: EPA-EFE

Bank of China said its net income plunged 11.5 per cent to 100.9 billion yuan between January and June. Its bad-loan ratio remained unchanged from the first quarter, standing at 1.42 per cent on June 30, but it was 0.05 percentage point higher than the end of last year.

Overall, Chinese banks reported a 9.4 per cent fall in first-half earnings at 1 trillion yuan, according to the China Banking and Insurance Regulatory Commission. By the end of the June, the average NPL ratio for commercial banks hit 1.94 per cent, the highest since 2009.

Beijing has required banks to sacrifice 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.

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