China’s biggest banks are accumulating their buffers on bad loans as the economy slows

China’s four megabanks are confident they can weather the threats to their asset quality posed by economic weakness by prudently protecting against potentially bad loans.

Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd., The world’s largest lenders by assets reported a year-on-year increase in net income of between 5% and 6% in the first half of 2022. Non-performing loan ratios also fell slightly at all four banks, despite increasing provisions for non-performing loans.

The stable earnings will boost investor confidence as China’s banks are exposed to the country’s struggling real estate sector, where some of the largest builders have defaulted on loans and customers in about 300 projects have defaulted on mortgage payments. GDP growth slumped to 0.4% year-on-year in the second quarter, from 4.8% in the first quarter, as China continues to struggle with COVID-19 infection hotspots. Earlier this month, the central bank cut interest rates further and the government asked banks to increase lending to stimulate the economy.

“The risks to the real estate sector are now widely known, and the deterioration in the sector’s credit quality is reaching a stage of stability,” Wang Jingwu, executive director and vice president of ICBC, said at the earnings conference on Aug. 30.

ICBC’s NPL ratio for home loans rose to 5.47% in the first half from 4.79% in the year-ago period. However, the headline NPL ratio at the world’s largest lender fell to 1.41% from 1.42%.

The Agricultural Bank “has solid provisions against the potential rise in loan defaults in China’s real estate sector,” said S&P Global Ratings, noting that its NPL ratio will remain broadly stable over the next 12 months as it has a good level of provisions .

ownership pain

“So far, the concerted actions by financial regulators, local governments, banks and bad debt management companies appear to have been successful in spreading the ticking bomb,” said Aidan Yao, economist at AXA Investment Managers, in an Aug. 26 note . “Beijing’s short-term focus is unlikely to end the adjustment [in the property market] but to manage its consequences.”

The aggregate NPL ratio of Chinese lenders fell to 1.67% in the second quarter of 2022 from 1.69% in the first quarter, according to data from the China Banking and Insurance Regulatory Commission. The aggregate NPL coverage ratio rose 3.1 percentage points to 203.8%, CBIRC said in an Aug. 19 press release.

China Construction Bank’s NPL ratio fell to 1.40% from 1.42%, while Agricultural Bank’s was 1.41%, down from 1.43% a year earlier. CCB’s reserve coverage ratio, which measures the funds banks set aside to cover potential losses on bad loans, was 244% at the end of the June quarter, down from 240% a year ago, while the Agricultural Bank reported a coverage ratio of 305%. , up from 300% a year ago.

Sufficient protection

The Agricultural Bank’s reserve coverage may decline “in an orderly fashion over a period of time,” Chairman Gu Shu said Aug. 30.

The Agricultural Bank could face distressed assets from its rural franchises because it owns more than 50% stakes in several rural lenders, Ratings said. However, due to the “solid” loan provisions, the impact on the bank should be limited.

Agricultural Bank, Construction Bank and ICBC asset quality metrics remain stable, said Shengbo Tang, banking analyst at Nomura Global Markets Research, amid improvements in NPL-related metrics.

CBIRC data suggests that overall asset quality in the banking sector is likely to remain stable given sufficient market liquidity, but regional banks are likely to face greater asset quality pressures given the economic downturn, according to Nomura.

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