Chinese Banks Face an Unprecedented Drop in Profit, UBS Says

(Bloomberg) --

Chinese banks face an unprecedented drop in profits this year as bad loans surge because of the coronavirus outbreak, according to UBS Group AG.

In a severe downside case, China’s banking industry could see bad debt jump to 5.2 trillion yuan ($743 billion) in 2020, UBS analysts led by May Yan said in a report. The estimate is based on an assumption that China’s economic growth stays at 4.8% annually until 2021 and 70% of the bad loans triggered by the lengthy economic shutdown emerge this year.

UBS expects this scenario will cause “a much harder hit to short-term profitability” for the sector, with earning dropping 39% and return on equity declining to 6.2% this year from 11%.

“The banking system hasn’t seen negative growth in profit over the years as they still managed to grow 2% through the relatively difficult period in 2015 and 2016,” Yan said in a call with reporters Tuesday.

China is taking action to protect both Chinese companies and the nation’s $41 trillion banking industry amid an outbreak that brought much of the world’s second-largest economy to a standstill. The measures include rolling over loans to companies at risk of missing payment deadlines and relaxing guidelines on how to categorize overdue debt.

The coronavirus outbreak will add $100 billion in credit losses to banks in the Asia-Pacific region this year with Chinese lenders bearing the brunt of the damage, S&P Global Inc said earlier this month.

--With assistance from Jun Luo.

To contact the reporter on this story: Alfred Liu in Hong Kong at aliu226@bloomberg.net

To contact the editors responsible for this story: Candice Zachariahs at czachariahs2@bloomberg.net, Jonas Bergman

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