China’s biggest banks suffered their worst drop in profits in more than a decade as a cascade of corporate lending across China deteriorates.
Reporting their first half results on Sunday,Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets,China Construction Bank Corp., the second largest,Agricultural Bank of China Ltd. etBank of China Ltd. all recorded profit declines of at least 10%. Provisions for loan losses jumped from 27% to 97% at all four banks.
China’s $ 45 trillion banking system has been put on the front lines to help ease the worst economic crisis in 40 years, sparked by a full-scale shutdown due to the virus outbreak. Authorities have demanded lenders forgo 1.5 trillion yuan ($ 218 billion) in profits by providing cheap finance, delaying payments and increasing lending to small businesses struggling with the pandemic.
|Highlights of first half results|
|ICBC net profit 148.8 billion yuan against 167.9 billion yuan a year earlier|
|CCB net profit 137.6 billion yuan against 154.2 billion yuan|
|AgBank’s net income 108.8 billion yuan against 121.4 billion yuan|
|BOC net income 100.9 billion yuan against 114.0 billion yuan|
In total, the country’s more than 1,000 commercial banks posted a 24% drop in profits in the second quarter, with NPLs hitting a record 2.7 trillion yuan. Last month, Citigroup Inc. cut the 2020 to 2022 profit forecast for China’s major banks by more than 10 percentage points and expects them to experience a 13% drop in profits this year.
“Under increasing political pressure, Chinese banks have not only had to further reduce loan yields to subsidize the real economy, but must also accelerate countercyclical provisioning and adopt more conservative NPL assumptions in setting provisions,” wrote Citigroup analysts led by Judy Zhang. . “The potential negative earnings growth will outstrip the performance of short-term Chinese banks’ stocks.”
Pressed by the government to lend to ailing businesses, loans and advances from the big four banks rose 7% to 10% in the first half of the year, although bad debts surged.
Investors have never been so pessimistic about the outlook for Chinese lenders. Shares of the biggest banks are trading at around 0.45 times their expected book value, a record valuation, after underperforming benchmarks in Hong Kong and the mainland for most of the past five years.
Moody’s Investors Service expects the pressure on bad loans to remain high amid low consumer confidence, putting bank profitability under pressure for the remainder of 2020. Economists forecast gross domestic product to increase by 2 % this year, after a 6.1% slowdown in 2019.
Chinese banks have joined the chorus of global lenders warning of a tough economic outlook. HSBC Holdings Plc said fallout from the pandemic could lead to loan losses of up to $ 13 billion this year, while JPMorgan Chase & Co. spoke of a prolonged slowdown and said the stimulus measures government made it more difficult to assess the economic damage.
In the worst-case scenario, Chinese banks could be guided to cut profits by around 20% to 25% in 2020, according to Jefferies analyst Shujin Chen. A further cut would hurt banks’ capital even without dividend payments and hurt financial stability, she said.
“The banking sector faces a more complex and uncertain external environment,” CCB said in its report, citing the pandemic, economic “downward pressure” in China, “geopolitical tensions” and the potential for disruption of the economy. globalization.
China is slowly recovering as President Xi Jinping ramps up efforts to make the economy more independent amid growing confrontation with the United States over everything from trade to finance and technology.
Tensions between the world’s two superpowers over Hong Kong have sparked tit-for-tat sanctions against politicians and officials on both sides in recent weeks. The largest Chinese lenders are scrutinizing their accounts so as not to jeopardize their access to crucial dollar funding. The Big Four banks had $ 1.2 trillion in such financing at the end of June and could face fines for doing business with one of the 11 Hong Kong and mainland officials targeted by US sanctions.
– With the help of Jun Luo and Alfred Liu
(Adds revenues from ICBC, BOC.)