China’s largest banks are warning of a hit to profitability and asset quality this year as they comply with government orders to extend low-cost loans to companies affected by the coronavirus outbreak.
Profits last year for China’s big four state-owned commercial banks, which rank among the world’s largest lenders, came in above analyst expectations, results released over the past week showed.
But profit growth is expected to be eroded and bad debts are likely to stack up in 2020 as banks do their national duty to help battle the economic destruction caused by the pandemic.
Since the outbreak of coronavirus in January, Beijing has ordered the country’s banks to step up their assistance to the national recovery effort by continuing to lend to troubled companies while also lowering interest rates.
Such “national service” is a common practice for state-owned companies in China and often includes making non-commercial decisions to help the economy at the expense of profits.
“This is the market concern for the big banks: the so-called national service they have to do,” said May Yan, head of greater China financials equity research at UBS. “They are required to keep bringing down the lending rate but this is not very commercial for the shareholders.”
The People’s Bank of China has already cut the benchmark lending rate in order to help struggling companies borrow at reduced costs, and analysts expect it to lower the rate several more times this year, further squeezing net interest margins — a key gauge of banks’ profitability.
Industrial and Commercial Bank of China, the world’s largest commercial bank by total assets, posted a net profit of Rmb312bn ($44bn) for 2019, up 4.9 per cent from the previous year.
Bank of China reported a 4.1 per cent rise in profit to Rmb187bn, but also noted in its annual report that coronavirus had “taken a phased toll on the economy” and would probably have an impact on the group’s asset quality.
Agricultural Bank of China, the country’s third-largest commercial bank, warned the pandemic could cause distress among its manufacturing customers: “The decrease in global demand will affect China’s exports, and trade barriers resulting from the Covid-19 outbreak are also likely to affect our industrial chain.”
AgBank’s net interest margin shrank sharply in 2019 to 2.17 per cent from 2.33 a year earlier, and analysts expect the bank’s profitability to continue to suffer in 2020.
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The net interest margin for China Construction Bank, the country’s second-largest commercial bank, contracted by 5 basis points in 2019 as its deposit costs climbed by 18 basis points. CCB said it expected its net interest margin to shrink another 10 bps this year.
“We expect the bank’s asset quality to come under pressure in 2020. CCB faces additional provision requirements stemming from asset quality deterioration in a few sectors hit hard by Covid-19,” S&P Global analyst Phyllis Liu said in a recent report.
Michael Chang, director of China financials at CGS-CIMB Securities, said he expected net interest margins at China’s big four banks to fall by 10-12 basis points in 2020 primarily owing to cuts in the loan prime rate.