China’s biggest banks increase bad debt reserves as economy slows


China’s four megabanks are confident they can weather threats to their asset quality from economic weakness, with careful provisioning against potential bad debts.

Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd., the world’s largest lenders by assets, reported increases in net profit between 5% and 6% year-over-year in the first half of 2022. Non-performing loan ratios also fell slightly for the four banks, even if they increased provisions for bad debts.

Stable earnings will boost investor confidence as China’s banks are exposed to the country’s struggling real estate sector, where some of the biggest builders have defaulted on loans and customers of around 300 projects have halted mortgage payments. GDP growth fell to 0.4% year-on-year in the second quarter, from 4.8% in the first quarter, as China continues to battle pockets of COVID-19 infections. Earlier this month, the central bank cut rates further and the government asked banks to increase lending to stimulate the economy.

“The risks to the real estate sector are now widely known, and the deterioration in the sector’s loan quality is reaching a stable stage,” said Wang Jingwu, executive director and vice president of ICBC, at the conference on August 30 results.

ICBC’s NPL ratio on home loans rose to 5.47% in the first half, from 4.79% in the same period last year. However, the overall NPL ratio at the world’s largest lender fell to 1.41% from 1.42%.

Agricultural Bank “has strong provisioning against the potential increase in credit defaults in China’s real estate sector,” S&P Global Ratings said, noting that its NPL ratio will remain broadly stable over the next 12 months as it has good levels of provisioning.

Pain property

“So far, the concerted actions taken by financial regulators, local governments, banks and bad debt management companies appear to have succeeded in spreading the ticking time bomb,” said Aidan Yao, economist at AXA Investment Managers. , in a note dated August 26. “Beijing’s short-term goal probably doesn’t end the adjustment [in the property market] but managing its fallout.”

The overall NPL ratio of Chinese lenders fell slightly to 1.67% in the second quarter of 2022, from 1.69% in the first, according to data from the China Banking and Insurance Regulatory Commission. The overall NPL coverage ratio climbed 3.1 percentage points to 203.8%, the CBIRC said in an August 19 statement.

China Construction Bank’s NPL ratio fell to 1.40% from 1.42%, while that of Agricultural Bank was 1.41% from 1.43% a year ago. The CWB’s provision coverage ratio, which measures the funds banks set aside to cover potential losses from bad debts, stood at 244% at the end of the June quarter, down from 240% a year ago. one year, while the Agricultural Bank posted a coverage ratio of 305%, compared to 300% a year ago.

Adequate protection

The Agricultural Bank’s provision coverage may decrease “in an orderly fashion over a period of time”, President Gu Shu said Aug. 30.

The Agricultural Bank could face troubled assets from its rural franchises as it holds more than 50% stake in several village lenders, Ratings said. However, the impact on the bank should be limited, thanks to its “solid” loan provisioning.

Asset quality metrics from Agricultural Bank, Construction Bank and ICBC remain stable, said Shengbo Tang, banking analyst at Nomura Global Markets Research, amid improving NPL-related ratios.

CBIRC data suggests that overall asset quality in the banking sector is likely to remain stable given ample market liquidity, but regional banks are likely to face increased pressure on asset quality amid the economic slowdown, according to Nomura.


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