China’s banks face unprecedented drop in profit, says UBS

Bloomberg

Chinese banks face an unprecedented drop in profits this year as bad loans surge because of the coronavirus outbreak, according to UBS Group AG.
In a severe downside case, China’s banking industry could see bad debt jump to 5.2 trillion yuan in 2020, UBS analysts led by May Yan said. The estimate is based on an assumption that China’s economic growth stays at 4.8% annually until 2021 and 70% of bad loans triggered by the lengthy economic shutdown emerge this year. UBS expects this scenario will cause “a much harder hit to short-term profitability” for the sector, with earning dropping 39% and return on equity declining to 6.2% this year from 11%.
“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,” Yan said.
China is taking action to protect both Chinese companies and the nation’s $41 trillion banking industry amid an outbreak that brought much of the world’s second-largest economy to a standstill. The measures include rolling over loans to companies at risk of missing payment deadlines and relaxing guidelines on how to categorise overdue debt.
The coronavirus will add $100 billion in credit losses to banks in the Asia-Pacific region this year with Chinese lenders bearing the brunt of the damage, S&P Global Inc said.
On Monday, China’s central bank unleashed $93 billion into financial system by offering medium-term loans to banks and cutting the amount of cash lenders must hold in reserve. Still, its decision to keep interest rates on the loans unchanged disappointed investors, as it signalled the People’s Bank of China won’t be lowering borrowing costs as aggressively as others, such as the US Federal Reserve.