Chinese banks brace for bad debt blowout as coronavirus pandemic piles weight on to struggling, debt-ridden businesses

Three leading Chinese state-owned banks reported that their non-performing loan ratios had stayed largely stable in 2019 even as the economy slowed amid a trade war with the US.

But bank officials and analysts expect their asset quality to worsen this year as the coronavirus strains the financial health of their borrowers.

Major Chinese lenders started reporting their full-year results on Friday. Ahead of Friday’s results, Fitch Ratings said in a press release on Thursday that it expects Chinese banks’ asset quality to weaken, with the extent of the deterioration contingent on the duration of the economic disruptions caused by the pandemic. Globally, Covid-19 has spread from the epicentre of Wuhan, Hubei province, to over 200 countries, claiming more than 24,000 lives.

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“Our revised GDP forecasts imply some immediate hit to banks’ asset quality, with the non-performing loan (NPL) ratio for our rated banks potentially rising to around 3.5 per cent from 1.5 per cent at end-June 2019,” said analysts including Vivian Xue, a director, and Elaine Xu, associate director at Fitch Ratings. China’s banking sector-wide NPL ratio was at 1.86 per cent at the end of last year.

Fitch Rating earlier this month cut its 2020 GDP growth forecast for China to 2.2 per cent, from 5.9 per cent before the coronavirus outbreak. China’s 2019 full year GDP grew 6.1 per cent, the slowest in 29 years.

Bank of Communications’ NPL ratio stayed flat in 2019, at 1.47 per cent, versus 1.49 per cent a year earlier. Its net profit attributable to shareholders rose 4.96 per cent to 77.28 billion yuan, from 73.63 billion yuan a year ago.

Senior management at the bank admitted there is a chance its NPL ratio would “rebound” this year, as the impact of the coronavirus began to show, even among some of its lower-risk borrowers.

“Our NPL might rebound this year, but this will affect all Chinese commercial banks alike. Even among some of our high quality clients, they might also face financial difficulties. [This implies that] we have to accelerate our debt collection and recovery business,” said Ren Deqi, chairman and executive director, on a results conference call.

China’s sixth largest bank by assets said net interest income rose 10 per cent to 144.08 billion yuan, from 130.91 billion yuan. Its net interest margin, a key gauge of a bank’s profitability, was stable, edging up slightly to 1.58 per cent from 1.51 per cent.

Industrial and Commercial Bank of China (ICBC) reported that net profit attributable to shareholders rose 4.9 per cent to 312.22 billion yuan for 2019, from 297.68 billion yuan a year ago, beating analysts’ estimates of 310 billion yuan calculated by Reuters.

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The world’s biggest listed lender by assets reported that net interest income rose 6 per cent to 606.93 billion yuan from 572.52 billion yuan. Its net interest margin dropped slightly to 2.24 per cent from 2.3 per cent.

“While the domestic economy has remained generally stable, it is facing mounting downward pressure, especially with the heavy blow from the sudden Covid-19 outbreak,” the bank said in its results announcement filed to the Hong Kong stock exchange.

ICBC’s non-performing loan ratio declined to 1.43 per cent from 1.52 per cent.

Bank of China’s net profit attributable to shareholders rose 4.1 per cent to 187.41 billion yuan from 180.09 billion yuan a year ago, beating analysts expectation at 182.19 billion yuan calculated by Reuters. Net interest income rose 4 per cent to 374.25 billion yuan from 359.71 billion yuan.

China’s fourth largest lender by assets saw its net interest margin drop to 1.84 per cent from 1.9 per cent a year ago, while NPL ratio improved slightly, declining to 1.37 per cent from 1.42 per cent.