Economy News Shares

China Reports First Drop in Profit Since Start of Crisis

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Some of China’s largest banks will post their first drop first-half profits since the global financial crisis, hit by a surge in bad debt and higher loan-loss provisions due to the corona virus pandemic, analysts and official data indicate.

The big five state banks including Industrial and Commercial Bank of China (ICBC) (SS:601398), China Construction Bank (OTC:CICHF) (CCB) (SS:601939), and Bank of China (BoC) (SS:601988) kick off their earnings season on Aug. 28.

“Banks had it easy in the past, but now many signs indicate they’re under great pressure,” said Hong Hao, head of research at BoCom International. “The pandemic has hit small businesses hard … the balance sheets won’t be pretty.”

Chinese commercial banks overall posted a 9.4% fall in first half net profit, while the six biggest posted a 12% profit fall from a year ago, according to China Banking and Insurance Regulatory Commission (CBIRC) data.

China’s cabinet said in June that authorities would push financial institutions to sacrifice 1.5 trillion yuan ($212 billion) in profit this year to support companies of all kinds by lowering lending rates and fees, and deferring loan payments.

The banking regulator has asked some state lenders to fully recognise bad loans on balance sheets and increase buffers for covering souring debt in the first half of the year, which will weigh on profits, two bankers from one of the lenders told Reuters.

In a rare move, some leading brokerages in China cancelled their forecasts for first-half bank earnings. One analyst, speaking to Reuters, cited uncertainties about “profits each bank may sacrifice for the real economy”.

Some smaller banks are also being pushed by the regulator to take measures such as slashing bankers’ salaries to shore up their balance sheets and face the “tough days”, bankers have said previously.

(Graphic: China banks’ earnings revisions – https://fingfx.thomsonreuters.com/gfx/mkt/azgvonmggpd/Pasted%20image%201597988612111.png)

In recent state media interviews, CBIRC chairman Guo Shuqing urged banks to set aside more cash as loan-loss buffers, and come up with “realistic” profit plans.

China’s banking industry is expected to dispose of 3.4 trillion yuan ($490 billion) of bad loans in 2020 to contain financial risks in an economy weakened by COVID-19, the official Xinhua News Agency reported on Aug 13.

The CBIRC and the banks did not immediately respond to requests for comment.

China’s economy returned to growth in the second quarter after a deep virus-induced slump at the start of the year, but analysts say the recovery remains fragile. Regulators have been urging lenders to offer cheap loans and lend more to small businesses in order to support employment and growth.

“It’s highly likely that banks will keep implementing some of the fiscal and monetary stimulus policies to counter the impact of COVID-19 in the second half of 2020,” said Zhang Chi, rating director of Fitch Bohua, the rating agency’s China unit.

“Lower interest rates, fee cuts, a lending push and loan payment forbearance measures will continue to squeeze the net interest margin of lenders.” Some of China’s largest banks will post their first drop first-half profits.

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Shiomi Saito

Shiomi Saito is a well known finance expert. She has served over 20 years in the finance Industry across Europe and Asia. In the past, she has held managerial positions in reputable global rating agencies and multinational banks. She has also managed regional teams across Europe and Asia which focused on analytics related to both corporate and financial Institutions. She is experienced in building index products for investment banks and multinational banks, risk management and analytics, key risk drivers including FX, geopolitical credit as well as macro over a wide range of sectors. She is also a finance writer and has written extensively for larger audiences. She is currently focused on the development of financial markets, in Currencies, commodities, alternative asset classes and global equities. She has been an author with MetaNews since Dec, 2013.
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