China's biggest banks' earnings outlook is clouded by tepid loan demand amid economic weakness and policy uncertainties.
The nation's four megabanks — Bank of China Ltd., Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd. and China Construction Bank Corp. — reported year-over-year net profit growth of between 5.0% and 6.0% in the first half of 2022, compared with a range of 9.9% to 12.3% in the same period last year. Their earnings growth in the rest of the year hinges on their ability to grow their loan books at a faster pace.
"There is still lack of demand for long-term credit from both corporates and households," said Michael Zeng, Hong Kong-based banking analyst at Daiwa Capital Markets. Recovery is not likely until the fourth quarter this year as the challenges in the macro environment need time to be resolved, Zeng said.
China's purchasing managers' index has reflected a contraction in manufacturing in recent months and exports slowed in July and August. The sluggish indicators underscored a slowdown in the world's second-biggest economy, as gross domestic product expanded just 0.4% year over year in the second quarter, compared with 7.9% in the same period of 2021. The People's Bank of China cut its medium-term lending facility rates and loan prime rates in August, lowering the cost of borrowing not only for banks, but also for corporates and home buyers.
Flat loan growth
The aggregate loan growth in the first half was 11.2%, according to the China Banking and Insurance Regulatory Commission, nearly unchanged from the same period of 2021.
"The biggest problem China faces right now is not the lack of liquidity, but the vanished demand," said Gary Ng, senior economist at Natixis. "Hence the current loan growth is not enough to pull the economy out of the quagmire."
Easing mode
The People's Bank of China will likely continue easing monetary policy to support the economy, said Zhaopeng Xing, a China strategist at ANZ. Xing expects further cuts of 20 basis points in the policy rates and of 75 basis points in the cash reserve ratio before the end of 2023.
"One should not expect massive additional stimulus but fine-tuning and follow-up of existing policy measures," said Bruce Pang, head of Greater China research at Jones Lang LaSalle, as "policymakers are not going to use tools with only short-term gain yet longer-term pain to rescue the economy amid unexpected headwinds."
Still, "restarting the growth engine by propping up domestic demand and consumption with stabilized expectations remains a key, yet challenging policy priority," Pang added.
Lower interest rates, however, will squeeze the banks' net interest margins and drag on profits.
Among the big four, NIM contracted between 4 basis points and 10 basis points in the first half at Industrial & Commercial Bank of China, Agricultural Bank and Construction Bank. The only exception was Bank of China, which reported its NIM stayed flat as the lender has the largest portion of international business among peers.
The downward pressure on the NIMs will likely persist on interest rate cuts and lower investment yield, according to a Nomura research note dated Aug. 23, although the magnitude could moderate in the second half of 2022 as most of the loan repricing will likely take place in the first quarter of 2023.
Other income
Fee and commission income remained stable in the first half of 2022 after a slump last year. Contraction in the mutual fund distribution business moderated while the insurance distribution business and wealth management subsidiaries provided some buffer, Daiwa's Zeng said, adding pressure may alleviate if the economy recovers in the second half of the year.
