China's big banks flag asset pressure due to virus, boding ill for smaller kin

[March 30, 2020]  By Cheng Leng and Engen Tham

BEIJING/SHANGHAI (Reuters) - China's largest state banks said the impact of restrictions on movement imposed to slow the spread of the coronavirus could pull down asset quality as borrowers struggle to repay loans, though they are likely big enough to weather any fallout.

The comments come as four of the country's largest state-backed lenders posted estimate-beating fourth-quarter profit - but they bode ill for smaller lenders, who have less capital reserves and can call on fewer state borrowers.

The outbreak beginning at the end of last year has left many airlines, hotels and other businesses fighting to survive after government countermeasures all but paralyzed economic activity for over a month.

China's largest lenders - Industrial and Commercial Bank of China Ltd (ICBC) <601398.SS> <1398.HK>, China Construction Bank Corp (CCB) <601939.SS> <0939.HK> and Bank of Communications Co Ltd (BoCom) <601328.SS> <3328.HK> - posted annual profit growth of over 4% for 2019 due in part to improving asset quality.

A prolonged pandemic might break the upward trend with rising soured debt and shrinking net interest margins (NIM), a gauge of banks' profitability, senior bankers said.

"We expect there will be an increase in overdue loans in the first quarter and first half," Bank of China Ltd's <601988.SS> <3988.HK> Chief Risk Officer Liu Jiandong said after the lender published annual results on Friday. The bank's president added that the impact is likely to be short-term and controllable.

ICBC President Gu Shu likewise said the outbreak "will put some pressure on our asset quality," but that the lender is confident on its overall situation.

Big-bank confidence is down in part to plush capital reserves which can help ease the impact of a downturn.

The provision coverage ratio at ICBC was 212.53% at the end of December, compared with 198.09% three months prior. CCB's ratio rose to 227.56% from 218.28% in the same period.

A sanitation worker wearing a face mask walks past a branch of Industrial and Commercial Bank of China (ICBC) in Wuhan, the epicentre of the novel coronavirus outbreak, Hubei province, China February 25, 2020. REUTERS/Stringer

China's largest banks have also benefited from preferential government policies such as support to tackle bad loans. They often lend to the biggest state-owned firms which are less risky and which helps buoy profit even during economic downturn.

Smaller lenders, by comparison, have had a tougher time.

Inner Mongolia lender Baoshang Bank Co Ltd was rescued by the government in May and there was a run on Yingkou and Yichuan Rural Commercial Bank in November.

"We estimate non-performing loans will total 250 billion yuan ($35.23 billion) in the best-case scenario as a result of the outbreak," said analyst Liao Zhiming at TF Securities.

Smaller banks with lower capital reserves are likely to struggle the most.

"The pattern of low provisions, high non-performing loans and high overdue loans suggests rural commercial banks are short of capital," Gavekal Dragonomics said in a client note.

On Monday, Moody's Investors Service changed its view of the outlook of six Chinese banks, including Bank of Nanjing Co Ltd <601009.SS> and the Bank of Ningbo Co Ltd <002142.SZ>, to negative, citing the impact of the virus through exposure to highly affected industries such as manufacturing and trade.

Overall, the NIM of banks is likely to keep narrowing, bankers and analysts said, as the government and central bank urge lenders to sacrifice profit to support companies during the downturn.

At BoCom, the NIM was slightly wider at the end of December than three months earlier. It narrowed at ICBC and CCB and was steady at BoC.

Senior BOC and ICBC officials also flagged risk relating to recent global market turmoil, saying contingency plans would be in place to curb credit and operational risk abroad.

(Reporting by Cheng Leng in Beijing and Engen Tham in Shanghai; Additional reporting by Zhang Yan in Beijing; Editing by Christopher Cushing)

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