China’s Big Banks Are Under Pressure From Rising Bad Loans

(Bloomberg) -- China’s biggest banks eked out profit growth in the first quarter even as bad loans climbed with borrowers reeling from the worst economic slump in four decades.

In earnings releases on Tuesday, Industrial & Commercial Bank of China Ltd. reported a 3% rise in first quarter profit, the slowest since the end of 2018. Bank of Communications Co. posted just a 1.8% gain. Agricultural Bank of China Ltd. delivered a 4.8% increase, while China Construction Bank saw a 5.1% increase.

While a battery of relief measures are helping to avert a deeper hit, China’s state-owned banks could face an unprecedented drop in profits this year as the government calls on them to bail out millions of struggling businesses hurt by the coronavirus outbreak.

Banks in the world’s most populous nation face additional credit costs of almost 1.6 trillion yuan ($226 billion), S&P Global forecast earlier this month. Credit losses are cascading through the global banking system, with the biggest U.S. lenders setting aside $25 billion to cover bad debt. HSBC Holdings Plc warned on Tuesday its credit losses could reach $11 billion this year.

“Stabilization of key economic data is crucial for the net non-performing loan formation rate to peak and balance sheets to recover,” analysts led by Zhang Shuaishuai at China International Capital Corp. said in an April 15 note.

China will see the slowest growth this year in more than 40 years, according to economists, who have drastically slashed their full-year forecasts for gross domestic product growth just to 1.8%.

In a severe downside case, assuming economic growth at 4.8% annually until 2021, China’s banking industry could face an unprecedented 39% slump in profits this year, according to UBS Group AG. Without government forbearance measures, their earnings may tumble by 70% to absorb the wave of bad debt.

Policy makers are taking action to protect companies and the nation’s $41 trillion banking industry, including injecting liquidity, cutting lending rates, rolling over loans to companies at risk of missing payments, and relaxing guidelines on how to categorize overdue debt.

The China Banking & Insurance Regulatory Commission last week revealed the industry’s non-performing loan ratio nudged up just 0.06 percentage point to 2.04% at the end of March. That comes after lenders deferred payments on and rolled over a combined 1.5 trillion yuan in loans.

ICBC set aside 59.5 billion yuan of provisions in the first quarter, up only 2%. AgBank’s provisions climbed 5%.

Consumer debt, however, has seen an immediate hit from the lockdown as millions of people lost their jobs. Fitch Ratings expects the non-performing loan ratio for consumer loans and credit card receivables to more than double to about 5%.

Investors have never been so downbeat on Chinese lenders’ outlook. Shares of the biggest banks are trading at about 0.54 times their forecast book value, a near record low valuation, after underperforming the benchmark indexes in Hong Kong and on the mainland for most of the past five years.

©2020 Bloomberg L.P.

With assistance from Bloomberg