Chinese banks cautious about bad loans despite windfall profits

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HONG KONG – China’s biggest banks, after posting their biggest increase in quarterly profits since the aftermath of the global financial crisis, are not yet ready to declare an end to the increase in bad loans.

As growth in the world’s second-largest economy accelerates after the pandemic, investors and analysts have called for a multi-year profit recovery after a drop in the first nine months of 2020, the worst since banks were listed more than ten years ago. However, senior bank management, including the Bank of China and the Industrial and Commercial Bank of China, are warning of the central bank shrinking and the expiration of small business support measures.

The Bank of China expects pressure on asset quality from the “marginal tightening of monetary policy, the removal of support measures for small and medium-sized enterprises and the delayed impact of the pandemic,” said the lender’s designated vice president, Chen Huaiyu, on a earnings conference call.

The pile of bad debt has plagued the $ 50 trillion banking system for years, and authorities unleashed rules in an attempt to curb problems like off-balance sheet shadow banking and pushed lenders to step up management of the bank. credit risk and capital levels.

Yet after being called upon to step in for “national service” last year during the pandemic by helping millions of borrowers with cheap loans and repayment holidays, bad debt levels have skyrocketed.

“We expect banks to spread credit cost pressures resulting from the pandemic until the end of 2023,” said Harry Hu, senior director of S&P Global Ratings. “The pressure on the cost of credit is also accompanied by a general increase in default rates. We expect high rates of formation of new nonperforming loans, rising cost of credit and write-offs that exceed the rate of growth of non-performing loans. loans over the next two to three years. “

Loans granted, which include those officially classified as non-performing, so-called special mention loans, or loans with potential to go bad, rose to 6.5 trillion yuan ($ 990.22 billion) by the end of 2020, or 4.5% of total loans, from 6.2 trillion yuan a year earlier, according to data from the banking regulator.

Credit rating agency S&P Global Ratings estimates that loans granted, in which small businesses could choose to defer interest and principal repayments until March 31 amid the pandemic, account for an additional 3.5% of total loans. ready and are classified as normal.

“NPLs that need to be processed could increase further in 2021 and the situation could last until next year,” Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, told a conference. release in March. “We have the confidence and the ability to deal with the problem.”

Speaking at the post-results call after the results on March 26, ICBC Vice President Wang Jingwu acknowledged the pressure on the quality of assets, especially loans that have deferred payment of the principal and interests, but said the impact was “controllable” as companies resumed production, alleviating the difficulties they faced last year at the height of the pandemic.

China’s manufacturing activity grew at the fastest pace in three months in March, data showed Wednesday, as factories increased output to meet improving domestic and global demand, adding new momentum to economic recovery. China was the only major economy to grow in 2020, and this year economic activity could exceed the 6% growth target announced by Prime Minister Li Keqiang in March.

The recovery helped banks recover some of the excess provisions they built for bad debts, which also fell 5% in the three months ended Dec. 31 compared to the previous quarter.

“We expect volatile NPLs ratios in the first half of the year as the payment holiday period expires and some loans are extended,” said Shujin Chen, analyst at Jefferies in Hong Kong.

Nonetheless, Chen said the biggest banks were more likely to earn double-digit profits in 2021 due to higher interest margins and lower NPLs this year compared to the year before. last. She said bank stocks are expected to outperform in the second and third quarters of the year.

The top five lenders – ICBC, China Construction Bank, Agricultural Bank of China, Bank of China, and Bank of Communications – all saw at least 44% increase in net income in the fourth quarter, the largest increase since minus 2009. This allowed them to achieve full-year earnings expansion, defying analysts’ expectations for a dip. The Bank of China achieved a 70% profit increase in the last three months of the year.

Five analysts polled by Nikkei Asia on average expect the largest lenders to realize a 7% increase in profits in 2021, as loan loss provisions decline and margins rise.

Higher profits should help Chinese bank stocks outperform in the second and third quarters, said Chen of Jefferies.

The CSI 300 Bank Index, which has also received a boost from investors pulling out of expensive tech stocks and deploying liquidity to sectors that can benefit from the economic recovery, climbed 10.7% this year from a decline. 3.3% for the larger CSI. 300 Index that tracks the largest stocks traded in Shanghai and Shenzhen. The banking index is also near a 14-year high.

“The historic burden of bad loans has now been largely absorbed and this has been a bigger factor than a single year of NPL formation,” said Mark Dong, who oversees $ 2.5 billion in assets, inducing Chinese bank stocks, as a co-founder of Minority Asset Management. “Therefore, I would say the majority of publicly traded banks can now work to improve the quality of the loan portfolio.”



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