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China's Big Six banks face Covid-19, inflation headwinds after double-digit profit growth in 2021

China's Big Six state-controlled banks reported double-digit profit growth for 2021, the best since 2013 and in line with analysts' expectations, helped by robust loan growth and fewer bad loans.

But with Covid-19 cases flaring up across China and rising inflation, senior bank officials and analysts painted a bleaker outlook, warning that non-performing loans at Agricultural Bank of China, Bank of Communications, Bank of China, China Construction Bank, Industrial and Commercial Bank of China (ICBC) and Postal Savings Bank of China could climb once again as the nation's economic recovery slows.

China's Big Six bank earnings to reflect recovery from Covid, stronger loan book

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The challenge for banks this year was highlighted by Bank of Communications' president Liu Jun, who said the pandemic presented the global economy with a great "variable".

"The Covid pandemic has [put] downward pressure on the economy on multiple fronts," said Liu. "Additionally, the Russia-Ukraine war has accelerated the global supply chain issue. This means that inflation could become an untameable monster."

He added that even in such a scenario Chinese banks would still have a lot of room to support the country's growth.

Beijing has targeted gross domestic product growth of about 5.5 per cent for this year, much lower than the 8.1 per cent growth in 2021. However, some analysts expect the rise in global commodity prices because of the Russia-Ukraine war to send inflation higher and weigh on GDP growth. China's official consumer price index rose by 0.9 per cent in February from a year earlier.

Postal Savings Bank of China topped profit growth among China's Big Six lenders. Photo: AFP alt=Postal Savings Bank of China topped profit growth among China's Big Six lenders. Photo: AFP>

Analysts at Jefferies had predicted profit growth of between 10 per cent and 15 per cent for the Big Six, while Morningstar had predicted 8 per cent to 10 per cent gain.

ICBC posted the smallest net profit growth among the Big Six at 10 per cent while Postal Savings Bank of China topped the list at 18.7 per cent.

The profit growth at the Big Six averaged 12 per cent last year, the best after 14.5 per cent in 2013.

Since then their NPL ratios started rising amid a downward trend in the country's GDP growth, said Chen Shujin, an analyst at Jefferies. Chinese banks' NPL ratio was likely to rise in the second half as the impact of a slowing economy would outweigh the relative ease of refinancing by borrowers in the first half, he added.

"Historically, whenever China's economic growth declined by 2 percentage points, banks' NPL ratio would begin to rise," said Chen.

Further clouding the outlook is the loan prime rates, the key benchmarks used by banks to price their corporate and mortgage loans, as analysts expect another cut in April or May. Since last December the one-year rate has been cut twice to 3.7 per cent, while the five-year rate was cut in January to 4.6 per cent, its first cut since April 2020. This would directly pressure banks' net interest margins.

Below is a summary of the Big Six banks' full-year results for 2021.

Agricultural Bank of China net profit rose 11.7 per cent to 241.2 billion yuan (US$38 billion). The NPL ratio improved to 1.43 per cent, from 1.57 per cent in 2020.

Bank of Communications net profit rose 11.9 per cent to 87.6 billion yuan. The NPL ratio declined to 1.48 per cent, from 1.67 per cent.

Bank of China net profit rose 12 per cent to 216.6 billion yuan. The NPL ratio declined to 1.33 per cent, from 1.46 per cent.

China Construction Bank net profit rose 11.6 per cent to 302.5 billion yuan. The NPL ratio declined to 1.42 per cent, from 1.56 per cent.

ICBC net profit rose 10 per cent to 348.3 billion yuan. The NPL ratio declined to 1.42 per cent, from 1.58 per cent.

Postal Savings Bank of China reported an 18.7 per cent jump in net profit to 76.2 billion yuan, the only bank that beat analysts' expectations. Its NPL declined to 0.82 per cent, from 0.88 per cent in 2020.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.