China banks' profit revival falters as lenders sucked in bad debt provisions

Hong Kong, May 11 (ANI): China banks' profit revival falters as country's largest lenders get sucked into further support for ailing parts of the economy and struggling state-owned companies (bad debts), despite a broad recovery from the coronavirus pandemic.
Nikkei Asia reported that this year was expected to mark the start of a multiyear recovery at China's commercial banks, after their combined net profit fell 2.7 per cent in 2020, the first decline in a decade.
But while profits are rising again, they are doing so more slowly than predicted. In the first quarter, commercial banks' net profit grew 1.5 per cent year on year, well below the 5 per cent analysts' consensus.
The four biggest bank of China - Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China (ABC) and Bank of China (BOC) -- profits rose by less than 3 per cent year-on-year, also missing analysts' expectations, reported Nikkei Asia.
The change in fortune has stalled a rally in bank stocks. The mainland bank index has fallen 7 per cent from its peak in February as investors fear that Chinese lenders will again lag their global peers.
Banks' continuing provisions for bad debts are one reason for the nasty surprise for investors. They remain at levels set at the heights of the coronavirus pandemic, reported Nikkei Asia.
Another dampener of profitability is the expectation that the lenders deliver "national services" for Beijing -- subsidizing small businesses by cutting fees and interest rates, extending loan holidays and boosting the proportion of lending.
"We see China banks tending to be less pro-cyclical than their global peers," Citigroup analyst Judy Zhang said, referring to an upswing in global bank profits as loan losses from the pandemic were not as bad as originally feared.
Chinese banks will record lower margins "despite the economic recovery," as regulators still want lower borrowing costs for the real economy, while "relatively high provisions" this year and next will result in "muted" earnings growth for most banks, she said.
Moreover, shareholders are also nervous about the fallout for banks from a possible restructuring of China Huarong Asset Management, the nation's largest bad debt manager.
Its offshore bonds slumped to junk levels, and Fitch Ratings and Moody's Investors Service cut their ratings last month after the company missed earnings disclosure deadlines, sparking fears of a debt restructuring, reported Nikkei Asia.
Valuations of "China banks are likely capped at their current trading ranges due to a lack of catalysts for profit," said Lawrence Chen, an analyst at CCB International Securities, a unit of China Construction Bank.
He has cut his profit expectations for the sector by 3 percentage points to annual growth of 5 per cent in 2021. Chen estimates a 9 per cent rebound next year.
China's largest banks have been guided by the government to grow loans to small and medium enterprises by at least 30 per cent this year. The target comes on the back of a 50 per cent rise last year, when the pandemic disrupted businesses and shut shops down for months, reported Nikkei Asia.
The government will also allow small enterprises to defer principal and interest repayments, and guide banks to lower loan rates for COVID-hit industries, according to a report unveiled in March at the annual meeting of parliament.
More lending to riskier companies at lower interest rates would hit bank profits and lead to concerns about asset quality, reported Nikkei Asia. (ANI)