Major Chinese banks are facing a squeeze after weak earnings growth in the first quarter, as sluggish credit demand outweighs modest improvements in net interest margins.
Among the nation’s four largest commercial banks, Agricultural Bank of China Ltd. posted the strongest net profit growth of 7.4% for the three months ended March 31 from a year earlier. Bank of China Ltd. came in last, with its earnings up 5.6% from a year earlier. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. saw their net profit rise 5.7% and 6.8% from a year earlier, respectively.
"Demand for credit, already hurt by the lingering COVID-19 lockdowns, will likely remain weak in the second and third quarter," said Eric Wang, Shanghai-based banking analyst at CMB International Capital Corp. Ltd.
Easing monetary conditions and weak loan demand bring a double whammy for Chinese banks. The latest rounds of city-wide lockdowns to contain the pandemic have posed another challenge to the world's second-largest economy that started slowing in late 2021 amid waves of defaults of property developers.
China's Politburo, the nation's top leaders, said after a meeting on April 29 that the authorities will boost stimulus and contain the COVID-19 outbreak, with an aim to meet the annual GDP growth target of about 5.5%. They called for utilizing all kinds of monetary policy tools, in addition to measures to stimulate domestic demand including infrastructure investment as well as loosening its grip on the property market.
The meeting sent "clear signals of further policy support" and "reduced further downside risk to growth," said Tao Wang, head of Asia economics and chief China economist at UBS, in a note published April 29.
Sluggish loan demand
Despite rounds of easing, the loan growth of the so-called Big Four was largely unchanged from a year ago. Agricultural Bank posted the highest year-over-year loan growth of 5.7%, while ICBC came in last with loan growth of 4.5%.
Smaller banks saw sharper declines in loan growth. China Merchants Bank Co. Ltd., for example, reported 3.4% loan growth in the first quarter, slowed from 5.6% a year earlier.
China's loan growth in the first half of this year will be driven by monetary easing and increased fiscal support to the economy, according to Iris Tan, a banking analyst at research firm Morningstar.
The People's Bank of China has lowered its policy lending rates twice and reserve requirement ratio three times over the past 10 months. More cuts are expected by economists to support economic growth. China's first-quarter GDP growth was 4.8%, and credit demand was not picking up amid the economic slowdown.
Easing margin pressure
The net interest margin of the Big Four ranged from 1.74% to 2.15% in the first quarter, largely unchanged from the previous quarter.
"Pressure on NIM will likely ease in 2022," said Eric Yang Bo, deputy managing partner of China Financial Service at Deloitte, amid little room for further cuts in policy lending rates and abundant liquidity, which reduces cost of funds.
A cut of the ceiling on interest rates of deposits in mid-April has helped protect lenders' NIMs, CMB International's Wang added.
Rising credit risk
The Big Four saw their nonperforming loan ratios steady in the first quarter. Bank of China's NPL ratio stood at 1.3% and three others reported ratios of 1.4%.
Asset quality, especially in the manufacturing and export sectors, may slightly worsen before improving again in the fourth quarter, according to CMB International's Wang. He estimated the industrywide bad loan ratio to increase by 5 basis points from the current level of about 1.8%.
Having said that, Tan said the overall asset quality of banks is holding up well despite the still-sluggish property sector. She expects more policy easing will help restore market confidence and boost loan demand.