China's four megabanks are confident they can weather threats to their asset quality posed by economic weakness, thanks to prudent provisioning against potential bad loans.
Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd., the world's biggest lenders by assets, reported net profit increases between 5% and 6% year over year in the first half of 2022. Nonperforming loans ratios also edged lower for all four banks, even as they increased provisions against bad loans.
The stable earnings will boost investor confidence as China's banks are exposed to the nation's troubled property sector, where some of the biggest builders have defaulted on loans and customers in about 300 projects stopped their mortgage payments. GDP growth slumped to 0.4% year over year in the second quarter, from 4.8% in the first quarter, as China continues to battle pockets of COVID-19 infections. Earlier this month, the central bank cut rates further and the government asked banks to step up lending to boost the economy.
"The risks to the property sector are by now largely known, and deterioration in the sector's loan quality is reaching a stage of stability," Wang Jingwu, ICBC's executive director and vice president, said at the results conference on Aug. 30.
ICBC's NPL ratio on property loans rose to 5.47% in the first half from 4.79% in the same period last year. However, the overall NPL ratio at the biggest lender in the world eased to 1.41% from 1.42%.
Agricultural Bank "has solid provisioning against the potential rise in credit defaults in the Chinese property sector," said S&P Global Ratings, noting that its NPL ratio will remain broadly stable over the next 12 months as it has good levels of provisioning.
Property pain
"So far, the concerted actions taken by the financial regulators, local governments, banks and bad-debt management companies appear successful in diffusing the ticking bomb," Aidan Yao, an economist at AXA Investment Managers, said in an Aug. 26 note. "The near-term focus of Beijing is likely not terminating the adjustment [in the property market] but managing its fallout."
The aggregate NPL ratio of Chinese lenders edged lower to 1.67% in the second quarter of 2022 from 1.69% in the first, according to China Banking and Insurance Regulatory Commission data. The aggregate NPL coverage ratio climbed 3.1 percentage points to 203.8%, CBIRC said in an Aug. 19 release.
China Construction Bank's NPL ratio eased to 1.40% from 1.42%, while that of Agricultural Bank was 1.41% compared with 1.43% a year ago. CCB's provision coverage ratio, which measures the funds banks set aside to cover potential losses from bad loans, stood at 244% at the end of the June quarter, compared with 240% a year ago, while Agricultural Bank reported a coverage ratio of 305%, versus 300% a year ago.
Adequate protection
Agricultural Bank's provision coverage could decline "in an orderly manner over a period of time," Chairman Gu Shu said Aug. 30.
Agricultural Bank may face distressed assets from its rural franchises as it has more than 50% equity interest in several village lenders, Ratings said. However, the impact on the bank is likely to be limited, thanks to its "solid" loan provisioning.
The asset quality metrics of Agricultural Bank, Construction Bank and ICBC remain stable, said Shengbo Tang, banking analyst at Nomura Global Markets Research, amid improvements in NPL-related ratios.
CBIRC data suggests that overall asset quality in the banking industry will likely remain stable given sufficient market liquidity, but regional banks will likely face more pressure on asset quality amid the economic downturn, according to Nomura.