Chinese bank earnings spared from property distress as Evergrande and troubled peers pose threats to loan quality
Chinese banks reported a strong set of third-quarter operating results, evading a distress among mainland property developers as the industry hit a rough patch. More tests await in the coming months as debt crunch persists, putting loan quality at risk, analysts said.
Bank of Communications and Postal Savings Bank of China recorded more than 20 per cent jump in earnings, beating analysts' estimates. Almost all of them showed lower sequential bad loan ratios, based on report cards from this week.
More challenges await as China's growth engines lose momentum while the property and manufacturing sectors take a turn for the worse. Gauges tracking Chinese banking stocks in Hong Kong, Shenzhen and Shanghai have lost 14 to 16 per cent since mid-February amid a crackdown on excessive leverage among developers, according to Bloomberg data.
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Financial distress at China Evergrande clouds the industry outlook at the same time the economy is fast losing its recovery momentum. Photo: AP alt=Financial distress at China Evergrande clouds the industry outlook at the same time the economy is fast losing its recovery momentum. Photo: AP
China Evergrande, saddled with more than 1.97 trillion yuan (US$305 billion) of liabilities, has struggled to repay lenders and creditors. The likes of Fantasia Holdings, Modern Land and Oceanwide Holdings have defaulted on their offshore bond obligations and rating companies see the credit crunch stretching into 2022.
"If some of these developers still fail to repay their banks during the fourth quarter, then banks would have to book these as non-performing loans (NPLs)," said Cindy Wang, an analyst at DBS.
Banks are exposed to the property sector through loans to developers and mortgages to homebuyers in projects involving troubled developers. Lending to property developers accounted for an estimated 8 per cent of banking loans, analysts estimated.
"Currently, there are still many uncertain factors in the process of global economic recovery and the pandemic situation," Bank of Communications said in its results statement on Friday. "The basis for domestic economic recovery needs to be further [supported]."
Optimism about China's economy has waned as recovery lost momentum over the past three quarters, fuelling speculation policymakers will turn on the stimulus tap. A surge in commodity prices and power cuts contributed to a sharper than estimated contraction in manufacturing this month, the government said on Sunday.
Without any pullback in policy-tightening measures in the industry, Chinese developers could struggle to refinance their debt, according to Jefferies. The outcome would be higher NPLs in 2022, its analyst Chen Sujin said.
China manufacturing shrinks for second month amid high material prices, soft demand
Moderating growth, tightening of credit supply and heightened standards of regulations remain headwinds for the Chinese equity market, strategists at Schroders said in a report earlier this month. Investors should wait for greater signs of credit easing before taking on more risk, they added.
Below is a summary of key third-quarter banking results earlier this week.
Bank of Communications posted a 38 per cent increase in net profit to 22.3 billion yuan from a year earlier, the strongest gain among the six biggest state-controlled banking groups. Its NPL ratio was 1.6 per cent versus 1.87 per cent for the sector.
Industrial and Commercial Bank of China's net profit rose 10.6 per cent to 88.3 billion yuan from a year earlier. Its NPL ratio declined to 1.52 per cent from 1.54 per cent at the end of June.
Profit at China Construction Bank increased 15.6 per cent to 78.9 billion yuan from a year earlier. Its NPL ratio declined to 1.51 per cent from 1.53 per cent on June 30.
Bank of China's earnings increased 13.2 per cent to 50.7 billion yuan, with its NPL ratio marginally lower at 1.29 per cent versus 1.3 per cent on June 30.
Agricultural Bank of China's net profit rose 14 per cent to 64.4 billion yuan. The lender trimmed its bad loans to 1.48 per cent of total lending, a drop from 1.5 per cent on June 30.
Postal Savings Bank's net profit rose 22.5 per cent to 23.5 billion yuan, from 19.2 billion yuan while its NPL ratio was unchanged at 0.82 per cent.
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 © 2021 South China Morning Post Publishers Ltd. All rights reserved.
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