Retail loans a bright spot for China’s major banks as coronavirus continues to bite into profits

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Leading Chinese banks reported declines in their third quarter profits, as a swelling pile of sour loans among borrowers hit hard by the coronavirus continued to bite into their bottom lines.

But the banks saw some recovery in their retail lending business, helped by mainland China’s economic rebound in the three months to September 30. The world’s second biggest economy grew by 4.9 per cent year-on-year.

China’s retail borrowers’ ability to repay will continue to improve going into the fourth quarter, the lenders forecast. Retail sales in mainland China rose 3.3 per cent in September from a year ago, the second monthly increase this year after a 0.5 per cent pick-up in August. The figures underscore China’s swift rebound from the impact of the pandemic.

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Senior officials at Bank of Communications were optimistic that the worst impact of the coronavirus on asset quality was behind them.

“With the pandemic in China coming under control, and businesses and production having returned to normal, we are seeing the overall asset quality [of our loan book] trending towards an improvement,” said chief risk management officer Zhang Hui during a media call on the results last Friday.

Bank of Communications’ third quarter net profit came to 16.2 billion yuan (US$2.42 billion), down 6.9 per cent from the same period a year ago. For the first nine months, net profit was 52.7 billion yuan, down 12.4 per cent from 60.1 billion yuan.

Weighing on profit was loan loss provisioning – money set aside to cover uncollected loans – which rose 41 per cent year-on-year to 51. 9 billion yuan.

The bank’s non-performing loan (NPL) ratio stood at 1.67 per cent. New formation of sour loans in its credit card business declined 23 per cent from the second quarter, Zhang said.

While most banks’ retail business was affected by the economy-crippling impact of Covid-19 earlier this year, it largely recovered during the third quarter, said Terry Sun, a banking analyst at CMB International Securities.

“Based on some of the feedback we got from banks earlier, credit card NPLs should have already peaked around June or July. The worst of the retail non-perform loan at Chinese banks is behind us now,” said Sun.

Bank of China’s third quarter net profit dropped 1.6 per cent from the same period a year ago, to 44.8 billion yuan, from 45.5 billion yuan. For the first nine months this year, net profit totalled 145.7 billion yuan, down 8.7 per cent year-on-year from 159.6 billion yuan.

Loan loss provision for the nine months was 96.6 billion yuan, up 59 per cent from same period a year ago. NPL ratio stood at 1.48 per cent. Some analysts forecast that for the full year, banks’ NPL ratio could rise to 2 per cent as small business borrowers continue to face hardship from the pandemic.

Agricultural Bank of China’s third quarter net profit dropped 4.6 per cent to 56.5 billion yuan, from 59.2 billion yuan in same period a year ago, and for the first nine months it dropped 8.5 per cent, to 165.3 billion yuan.

Loan loss provision for the nine months climbed by a third to 139.1 million yuan from a year earlier, while the bank’s NPL ratio stood at 1.52 per cent.

Industrial and Commercial Bank of China’s third quarter net profit totalled 79.9 billion yuan, down 4.7 per cent from 83.8 billion yuan. For the nine months this year net profit dropped 9.2 per cent, to 228.7 billion yuan from 251.7 billion yuan.

Its loan loss provisioning rose 30 per cent to 179.8 billion yuan. Its NPL was 1.55 per cent.

China Construction Bank’s third quarter net profit dropped 4.1 per cent, to 68.2 billion yuan from 71.2 billion yuan in the same period last year. For the nine months, net profit dropped 8.7 per cent to 205.8 billion yuan.

The bank booked 46.7 per cent more in loan loss provisions year-on-year, totalling 161.3 billion yuan. Its NPL ratio stood at 1.53 per cent.

The average NPL ratio for the biggest state-owned Chinese banks as of June was 1.45 per cent, data from the banking regulator showed in August.

Sun said given the recovery seen in banks’ credit card business, those that are focused on retail lending, such as China Merchant Bank, Ping An Bank and Postal Savings Bank of China, should benefit more than most.

“Assuming macro conditions keep improving in the fourth quarter, profit decline at these large Chinese banks should further narrow,” said Sun. He predicted that for the full-year the five banks’ net profit would drop by about 6 to 7 per cent.

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