The five largest Chinese banks posted at least 10% year-on-year declines in profit for the first half of 2020, as they performed their mandated ‘national service’ of sacrificing profits, extending debt reprieve to businesses, and hiring new graduates to ease unemployment.
The first-half earnings reports, starting from August 28, highlighted the extent of the damage to each Chinese banking group as bad loans reached their highest level in a decade.
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The five lenders — Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China and Bank of Communications — expect rising bad debt and increased margin pressure in the months ahead.
Firms to give up over $200bn in profits to finance cheap business lending
Chinese banks, among the world’s largest by assets, are crucial players in both the government’s financial assistance programmes and its forbearance policies designed to give borrowers breathing space during the coronavirus.
The financial policies include providing loans with preferential conditions through financial institutions to certain frontline companies, reducing the costs of financing guarantee services, postponing the repayment of loans, optimising corporate bond issuance procedures and facilitating cross-border financing, which are generally available to eligible companies.
The Chinese financial sector must forgo a total of 1.5trl renminbi ($214bn) in revenue this year, as lenders are required to extend cheaper loans to small enterprises and tolerate later payments from them, Premier Li Keqiang said at a State Council meeting in June.
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By GlobalDataLike global peers, Chinese lenders have been facing an overall decline in net interest margins, with lending rates trending lower even without the new bailout duty.
The call to lend more aggressively to small businesses
Over the last few months, some large Chinese banks have boosted new loans for small enterprises by about 40% from a year ago.
New loans are being extended to the borrower group at an average interest rate of about 5%, down from 6-7% last year, while the bad loan ratio for small firms could exceed 5% at many midsize banks, based on our estimates.
That implies a certain level of losses could arise from the current round of national service. Bad debt concerns are partially reflected in the depressed valuations of Chinese banking stocks, many of which trade at an unusually low 0.4-0.6 times book value in Hong Kong.
Still, nationwide bank loans for small firms stood at a modest level of about 1.2trl renminbi, or less than a tenth of total loans outstanding.
It’s unlikely that the current lending spree will be extended to larger enterprises. In fact, banks are already turning their backs on some medium-sized companies on the verge of default.
Chinese banks’ net profits fell 24 per cent during the second quarter compared with a year earlier, the banking regulator said earlier this month.
