China’s big banks face tough year after posting profit gains

BLOOMBERG

China’s biggest state-owned banks warned of a tough 2023 as uncertain economic conditions may squeeze earnings after most delivered better-than-estimated profit growth for last year.
China’s tightly controlled $54 trillion banking industry was pushed to extend more credit in 2022 to help cushion the economy from a slowdown triggered by the nation’s strict pursuit of Covid zero, which helped lift profits last year even as margins narrowed.
The Covid policy, abandoned in late 2022, had weighed on economic growth and sapped consumer confidence. The impact from that could continue to play out into this year for the banks’ bottom lines, a bank executive warned.
“Profits in the banking sector tend to lag behind the economic cycle,” said Lin Hua, chief risk officer at Bank of Communications Co, at a briefing.  “We expect earnings in 2023 to be challenged by shrinking demand, supply shocks and weakening expectations.”
Industrial & Commercial Bank of China Ltd, the country’s biggest lender by assets, said net income rose 3.5% to 360.5 billion yuan ($52.6 billion), short of analysts’ estimates. Other banks topped or met forecasts, including Agricultural Bank of China Ltd, Bank of China Ltd and Bank of Communications Co.
The state-owned banks posted a 13% decline in pre-provision operating profit, which is income before accounting for funds set aside for bad debts, in the last quarter of 2022 — the worst quarter since 2010, Shujin Chen, an analyst at Jefferies Financial Group Inc, said in a note to clients.
Most of the banks also reported deteriorating net interest margins, a measure of profitability that will likely fall further in 2023.
China’s financial system has been largely insulated from the global banking turmoil of recent weeks. Executives at China Construction Bank and Bank of Communications said they have seen very limited impact from the turbulence at Silicon Valley Bank and Credit Suisse Group AG.