China’s Big Four state-owned banks’ first-quarter earnings growth comes in line with analysts’ expectations

Georgina Lee
·4-min read

Leading state-owned Chinese banks reported first-quarter profit growth in line with analysts’ expectations while exceeding the mainland’s industry average of a 1.5 per cent profit increase, as they were helped by lower bad-loan provisions and continuing economic recovery.

China Construction Bank led the profit growth among the Big Four state-owned lenders, reporting a net income of 83.1 billion yuan (US$12.85 billion), up 2.8 per cent from the same period in 2020.

Industrial and Commercial Bank of China (ICBC), the mainland’s largest lender by assets, reported a 1.5 per cent year on year rise in net profit to 85.7 billion yuan for the three months ended March.

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First-quarter profit at Bank of China rose 2.7 per cent year on year to 54 billion yuan, while Agricultural Bank of China said its earnings in the first three months of the year grew 2.6 per cent to 65.9 billion yuan.

“Their earnings results met market expectations,” said Ivan Li, a fund manager at Shanghai-based Loyal Wealth Management.

“Improved economic fundamentals paved the way for banks’ profit growth, but they need to be cautious against a potential rebound in bad loans because some of the corporate borrowers are still victims of the coronavirus outbreak.”

Apart from the Big Four, Shanghai-based Bank of Communications posted a 2.3 per cent rise in first-quarter profit to 21.9 billion yuan.

The top banks reported a decline in their non-performing loan (NPL) ratio over the past three months as the banking regulator required them to strengthen risk management and refrain from lending to some sectors such as property.

ICBC was an exception, as its NPL was unchanged at 1.58 per cent at the end of March.

“We expect China banks’ NPL ratio to peak by the end of second quarter this year, thanks to economic recovery,” Chen Shujin, an analyst at Jefferies, said in a research note on Wednesday.

She added that it could be volatile in the first two quarters because of the deterioration of some loans rolled over from last year when the pandemic was raging in China.

To relieve the economic hardships suffered by small businesses due to the coronavirus-related restrictive measures, Chinese banks were ordered to defer loan repayments until March this year.

The deferred loans amounted to 6.6 trillion yuan last year, according to China Banking and Insurance Regulatory Commission.

China Construction Bank led the first quarter profit growth among the mainland’s biggest lenders. Photo: Reuters
China Construction Bank led the first quarter profit growth among the mainland’s biggest lenders. Photo: Reuters

The mainland’s banking regulator said earlier this month that the bad loan ratio at banks across the country declined to 1.89 per cent in March from 1.92 per cent at the end of 2020.

Chinese banks will continue to face pressure on their net interest margin this year, as they heed the government’s call to keep financing costs low for small businesses to support the real economy’s recovery, said Calvin Zeng Hao, an audit partner at Deloitte China based in Shanghai.

“This will continue squeezing banks’ interest margin this year because they will have limited room to lower the interest rate they pay on deposits,” said Zeng. The interest rate paid on deposit represents part of a bank’s funding cost.

China’s economic output in the first quarter expanded 0.6 per cent from the fourth quarter of 2020, the latest sign that recovery in the world’s second-largest economy is still ongoing despite growing at a lower pace than the fourth quarter .

Mainland banks’ fortunes are tied to the country’s economic growth given their role as the conduit of the government’s economic policies.

China has set an economic growth target of “above 6 per cent” for 2021 after it grew by 2.3 per cent last year. However, analysts expect growth to easily surpass that target, at more than 8 per cent this year.

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