Worst profit slum on China’s mega banks bad debt wave

Photographer: Kevin Fryer / Getty Images

China’s biggest banks faced a decline of their worst profit in more than a decade as a cascade of debt for businesses across China continues to worsen.

Reporting its first-half earnings on Sunday, Industrial and Commercial Bank of China Ltd., the world’s largest lender by property, China Construction Bank Corp, the second largest, Agricultural Bank of China Ltd. and Bank of China ltd. All reported a decline in profit of at least 10%. The loan loss provisions at the four banks jumped between 27% and 97%.

China’s $ 45 trillion banking system has been put on the forefront of helping to ease the worst economic recession in 40 years due to a massive shutdown due to virus outbreaks. Authorities have lent leverage to lenders to take advantage of 1.5 trillion yuan ($ 218 billion) by providing cheaper funds, increasing payments and lending to small businesses that are struggling with the epidemic.

First half earnings highlights
ICBC net income 148.8b yuan Vs 167.9 B Yuan years ago
CCB net income 137.6b yuan Vs 154.2b yuan
AgBank net income 108.8b yuan Vs 121.4 B Yuan
BOC net income 100.9B yuan Vs 114.0 B Yuan

Overall, more than 1,000 commercial banks in the country reported a 24% decline in second-quarter profits, with non-performing loans recording a record 2.7 million billion yuan. Citigroup Inc. last month slashed earnings estimates for major Chinese banks by more than 10 percentage points from 2020 to 2022 and they expect a 13% drop in profits this year.

“Under increasing political pressure, China’s banks not only had to further cut loan yields to subsidize the real economy, but also needed to accelerate counter-cyclical provision and adopt more conservative NPL assumptions in establishing provisions,” “Citigroup analysts wrote under the leadership of Judy Zhang. . “Potential negative earnings growth will outstrip China’s near-term stock performance.”

Due to the government pressurizing the four big banks to contend loans, loans and advances rose between 7% and 10% in the first half, even as bad debt had risen.

Investors have never been so low on the outlook of Chinese lenders. The stocks of the largest banks are based on their forecast book value, about 0.45 times the record low valuation, the benchmark index in Hong Kong and the mainland index for most of the past five years.

Moody’s Investors Service expects bad lending pressure to remain high amidst weak consumer sentiment, straining banks’ profits for the rest of 2020. Economists predict that GDP will grow 2% this year, slowing to 6.1% in 2019.

Chinese banks joined the chorus of global lenders warning of a difficult economic outlook. HSBC Holdings plc said the damage from the pandemic could be more than $ 13 billion this year, while JPMorgan Chase & Co. spoke of a long decline and said government stimulus made it harder to mitigate the economic damage Used to be.

At its worst, China’s banks could be directed to reduce profits by around 20% to 25% in 2020, according to Jefferies analyst Shujin Chen. It is further stated that without any dividend payment, the capital of the banks will suffer and be detrimental to financial stability.

“The banking industry is facing a more complex and uncertain external environment,” citing the epidemic in China, economic “downward pressure”, “geopolitical tensions” and the possibility of a disintegration in globalization, the CCB reported said in.

China is slowly recovering as President Xi Jinping is increasing his emphasis to make the economy more independent amidst a broader confrontation with the US over everything from trade to finance and technology.

Tensions between the world’s two superpowers over Hong Kong have led to sharp restrictions on leaders and officials of both sides over the past few weeks. China’s largest lenders are looking at their accounts so that their access to significant dollar financing is not jeopardized. The big four banks had $ 1.2 trillion in such funding at the end of June and could face fines for doing business with any of the 11 Hong Kong and mainland officials targeted by US sanctions.

– Jun Luo, and with assistance by Alfred Liu

(ICBC adds earnings from BOC.)


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