China’s banks brace for virus to end ‘profit’ run

Bloomberg

The two-decade run of record profits at China’s biggest banks, which even survived the financial crisis, is facing its biggest test.
Banks such as Industrial & Commercial Bank of China Ltd., the world’s largest by assets, are caught in a vise as their operations are hammered by the outbreak of the deadly coronavirus. At the same time, they are being called on to help rescue the world’s second-largest economy now facing its slowest growth in four decades.
Their asset quality, net interest margins, capital buffers and ability to bring in new clients are all under pressure as economic activity halted in China at the start of the year, according to senior executives at some of the nation’s biggest lenders. The $41 trillion banking industry, more than twice as large as the US sector, is depleting its capital and bad-loan reserves as it rolls over delinquent debt to keep millions of businesses afloat, adding to woes that built up in 2019.
Analysts at UBS Group AG have predicted that China’s banking industry could suffer an unprecedented 39% slump in profits this year, even with government support on absorbing bad loans. Take that backing away, and the earnings tumble could be as large as 70% in a worst-case scenario.
Some of the biggest banks, including ICBC, delivered their results from 2019, posting profit gains of about 5%, even as they were weighed down by the trade dispute with the US and an ongoing effort by Beijing to crack down on overall leverage.

ICBC’s allowances for losses on loans jumped to 479 billion yuan ($67 billion) last year, up 70% over the past four years.
While officials at the state-run banks stressed the long-term resilience of the economy, ICBC President Gu Shu said its asset quality will be impacted further as consumers and export-related sectors are bearing the brunt of the economic shock delivered by the virus. Bank of Communications Co.’s Vice President Hou Weidong said the damage has rippled through the entire banking industry while Bank of China Ltd. announced it will kick off a new round to raise capital to strengthen buffers.
S&P Global estimated last month that a prolonged health emergency could cause China’s non-performing loan ratio to more than triple to about 6.3%, amounting to an increase of 5.6 trillion yuan in bad debt. China has since loosened the standards for recognizing bad loans as part of its crisis measures, and the ratings firm expects “questionable” loans to peak at 11.5% of gross loans in the aftermath of the epidemic.
“The banking system hasn’t seen negative growth in profit over the years as they still managed to grow 2% through the relatively difficult period in 2015 and 2016,” said May Yan, an analyst at UBS in Hong Kong.
Deteriorating asset quality and profitability are also raising concerns that more regional banks will come under pressure after at least three were bailed out or rescued last year. Stress tests last year showed 17 of the nation’s 30 biggest banks would fail if economic growth slowed to 4.15%. China’s economy is now predicted to expand just 2.9% this year.
Investors are also downbeat. The shares of the biggest banks are trading at about 0.55 times their forecast book value, a near record low valuation, after underperforming the benchmark indexes in Hong Kong and on the mainland for most of the past five years.
Shares of ICBC fell 0.8% as of 9:32 a.m. in Hong Kong, extending this year’s decline to 14%, while China Construction Bank Corp. and Bank of China both dropped 1.4%.
China’s banks have set aside 6 trillion yuan to deal with bad loans, but the pressure will build if the economy doesn’t ramp up rapidly in the second quarter, a prospect that’s becoming more and more in doubt as economies around the world are now going into lockdown.
The virus is having an unprecedented impact on the global economy, financial system and social governance, Li Jianhong, Chairman of China Merchants Bank Co. said at a briefing this month. “We should prepare for the worst, try our utmost and strive for the best.”