Pressure to revive economy muddies earnings outlook for China's top
banks
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[August 22, 2023] By
Ziyi Tang and Ryan Woo
BEIJING (Reuters) - A scramble by Chinese policymakers to tackle a debt
crisis in the property sector and shore up the economy is set to deal a
blow to the earnings prospects for its big banks as they are pressed
into the task of boosting credit demand.
China's top five state-owned banks are expected to post a sharp decline
in revenue and narrower net interest margins (NIM) as they turn in
half-yearly results, with China Construction Bank kicking-off the
reporting season on Wednesday.
The results will come against the backdrop of record-low credit growth
in July, default risks at some housing developers and missed payments by
a private wealth manager linked to shadow banking that has raised
contagion risk to the broader economy.
The banks are also battling headwinds such as lower lending rates and
pressure from the government to prop up the economy - which has been
buffeted by weak demand both at home and abroad - as well as bad debt
related to property developers and local government financing vehicles (LGFV).
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"The biggest challenge for Chinese banks is navigating the increasingly
low net interest margin as the credit demand remains subdued in the real
economy," said Gary Ng, senior economist at Natixis Corporate &
Investment Banking.
"While there is support from greater exposure to government-related
assets, it is more uncertain than ever on whether this can fully buffer
the weak demand in households and corporates."
China cut its one-year benchmark lending rate on Monday, which is set to
further weigh on banks' NIM.
Chinese commercial banks' NIM shrank sharply to 1.74% last quarter from
1.91% at the end of 2022, official data showed.
The situation has worried authorities, with the central bank warning
that banks needed to maintain a proper level of profit and NIM to ensure
sustainability in supporting the real economy.
DOWNSIDE RISKS
The half-yearly results of the top five banks and management commentary
should help provide a glimpse into the near-term earnings outlook for
the sector, as well as prospects for the world's second-largest economy.
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![](../images/082223PIX/busine29.jpg)
People walk past a branch of Industrial
and Commercial Bank of China (ICBC) in Beijing, China April 1, 2019.
Picture taken April 1, 2019. REUTERS/Florence Lo/File Photo
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Industrial and Commercial Bank of China Ltd's revenue is estimated
to fall 8.7% year-on-year in the second quarter of this year,
according to a median Refinitiv estimate.
Bank of Communications Co Ltd is estimated to report a 9.2% drop in
revenue, while Agricultural Bank of China Ltd's revenue is estimated
to drop down 4.2%.
Shares of China's biggest five banks have been sliding since early
May amid concerns over the weakening economy.
In the near term, banks face downside risks including from their
exposure to LGFV's debt restructuring and developers' default,
analysts at JPMorgan said in a research report.
Debt-laden municipalities represent a major risk to China's economy
and financial stability, after years of over-investment in
infrastructure and plummeting returns from land sales.
JPMorgan analysts estimate the government will take up the
responsibility for about 10% of the debt facing interest payment
problems, and then banks will roll over or restructure the remaining
loans.
That would likely lead to a rise in credit cost of about 4 basis
points and reduce NIM by about 6 basis points by 2025 for banks,
they estimated.
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In the property sector, banks will not just have to deal with
defaults but also have to restructure loans, meaning less interest
income in the coming years, said Christopher Beddor, deputy director
of China research at Gavekal Dragonomics.
"The biggest challenge by far is net interest margins."
"They could certainly do another deposit-rate cut, or even several.
Still, there's really no getting around the fact that banks will
need to sacrifice profitability to support the economy this year,"
Beddor added.
(Reporting by Ziyi Tang and Ryan Woo; Editing by Sumeet Chatterjee
and Himani Sarkar)
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