Chinese bank earnings recovery falters as lenders absorb bad debt provisions
Update: May 11, 2021 11:08 PM STI
Hong Kong, May 11 (ANI): The recovery in Chinese bank profits falters as the country’s largest lenders urge to further support troubled parts of the economy and troubled state-owned enterprises (bad debts), despite a large recovery after the coronavirus pandemic.
Nikkei Asia said this year is expected to mark the start of a multi-year recovery in Chinese commercial banks, after their combined net profit fell 2.7% in 2020, the first decline in a decade.
But if profits rise again, they do so more slowly than expected. In the first quarter, commercial bank net profit rose 1.5% year-on-year, well below analyst consensus of 5%.
China’s four largest banks – the Industrial and Commercial Bank of China, the China Construction Bank, the Agricultural Bank of China (ABC) and the Bank of China (BOC) – rose less than 3% from a year over year, also missing analysts’ expectations, Nikkei Asia reported.
The change in fortunes stalled a rally in bank stocks. The Mainland Banking Index fell 7% from its February high, with investors fearing Chinese lenders were once again lagging behind their global peers.
One of the reasons for the unpleasant surprise for investors is the banks’ ongoing provisions for bad debts. They remain at levels set at the peaks of the coronavirus pandemic, Nikkei Asia reported.
Another drag on profitability is the expectation that lenders provide “national services” to Beijing – subsidizing small businesses by reducing fees and interest rates, extending loan holidays, and increasing the proportion of loans. .
“We find that Chinese banks tend to be less pro-cyclical than their global counterparts,” Citigroup analyst Judy Zhang said, referring to rising global bank profits as loan losses from the pandemic were not not as serious as originally feared.
Chinese banks will post lower margins “despite economic recovery” as regulators still want lower borrowing costs for the real economy, while “relatively high provisions” this year and next will translate into by “moderate” earnings growth for most banks, she said.
In addition, shareholders are also worried about the fallout for banks from a possible restructuring of China Huarong Asset Management, the country’s largest bad debt manager.
Its offshore bonds have fallen to unnecessary levels, and Fitch Ratings and Moody’s Investors Service downgraded their ratings last month after the company missed the results disclosure deadlines, sparking fears of a debt restructuring, reported Nikkei Asia.
Valuations of “Chinese banks are likely capped at their current trading ranges due to a lack of profit catalysts,” said Lawrence Chen, analyst at CCB International Securities, a unit of China Construction Bank.
He lowered his profit expectations for the industry by 3 percentage points to achieve 5% annual growth in 2021. Chen estimates a 9% rebound next year.
China’s biggest banks have been guided by the government to increase lending to small and medium-sized businesses by at least 30% this year. The target comes on the back of a 50 percent increase last year, when the pandemic disrupted businesses and closed stores for months, Nikkei Asia reported.
The government will also allow small businesses to defer principal and interest repayments, and will guide banks to lower lending rates for industries affected by COVID, according to a report released in March at the annual parliament meeting.
More lending to riskier companies at lower interest rates would hurt bank profits and raise concerns about asset quality, Nikkei Asia reported. (ANI)