China’s biggest banks suffered their worst profit decline in more than a decade as a cascade of loans to businesses across China are going bad.
Reporting their first-half earnings on Sunday, Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, China Construction Bank Corp., the second-largest, Agricultural Bank of China Ltd. and Bank of China Ltd. all posted drops in profit of at least 10%. Loan loss provisions jumped between 27% and 97% at the four banks.
China’s $45 trillion banking system has been put on the front-line of helping alleviate the worst economic slump in 40 years, triggered by a large scale shutdown due to the virus outbreak. Authorities have required lenders to forgo 1.5 trillion yuan ($218 billion) in profit by providing cheap funding, deferring payments and increasing lending to small businesses struggling with the pandemic.
In total, the nation’s more than 1,000 commercial banks posted a 24% decline in second quarter profits, with non-performing loans hitting a record 2.7 trillion yuan. Citigroup Inc. last month slashed 2020 to 2022 earnings forecasts for major Chinese banks by more than 10 percentage points and expects them to suffer a 13% drop in profit this year.
“Under mounting political pressure, China banks not only have had to further cut loan yields to subsidize the real economy, but also need to accelerate counter-cyclical provisioning and adopt more conservative NPL assumptions in setting provisions,” Citigroup analysts led by Judy Zhang wrote. “The potential negative earnings growth will overhang the China banks’ near-term share performance.”
Pressured by the government to lend to struggling businesses, loans and advances at the four big banks rose between 7% and 10% in the first half, even though bad debt surged.
Investors have never been so downbeat on Chinese lenders’ outlook. Shares of the biggest banks are trading at about 0.45 times their forecast book value, a record low valuation, after underperforming the benchmark indexes in Hong Kong and on the mainland for most of the past five years.
Moody’s Investors Service expects bad loan pressure to stay high amid weak consumer sentiment, putting banks’ profitability under stress for the rest of 2020. Economists forecast gross domestic product will grow 2% this year, slowing from 6.1% in 2019.