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Chinese lenders' profitability and asset quality will likely improve in 2022 as China offers further monetary easing as well as policy support for the property sector, analysts said. |
Some of China’s largest state-run banks are set to report earnings declines for the fourth quarter of 2021, as the teetering property market dragged down economic growth and credit demand.
As lenders enter 2022, their profitability and asset quality will likely improve as China offers further monetary easing as well as policy support for the property sector while grappling with an economic slowdown and renewed lockdowns due to the omicron variant of COVID-19, analysts said.
Industrial & Commercial Bank of China Ltd., the nation’s largest bank by assets, would report normalized EPS of 19 fen in the quarter ended Dec. 31, 2021, down 13.6% from 22 fen a year earlier, according to the mean estimate of 18 analysts polled by S&P Global Market Intelligence.
China Construction Bank Corp.'s normalized EPS would fall to 22 fen in the fourth quarter of 2021 from 24 fen a year earlier, according to the mean estimate of 15 analysts. Agricultural Bank of China Ltd.'s normalized EPS would stand at 11 fen in the final quarter of 2021, down 21% from 14 fen a year earlier, based on the mean estimate of 19 analysts. Both banks reported year-over-year EPS growth in the first three quarters of 2021.
Bucking the downtrend is Bank of China Ltd., whose fourth-quarter normalized EPS would rise to 25 fen from 15 fen a year earlier, according to the mean estimate of 16 analysts.
On a full-year basis, all four banks are expected to report 8% to 10% normalized EPS increases for 2021 from 2020, largely due to stronger earnings growth in previous quarters.
Banks are scheduled to release their fourth-quarter and full-year 2021 results by the end of March.
Improving outlook
Fundamentals in China’s banking sector will likely improve due to accelerating income growth while nonperforming loan ratios will drop to the lowest levels since 2015, according to a March 11 note by Shanghai-based SWS Research Co. Ample market liquidity and bargaining power in setting interest rates on loans and deposits should enable banks to mitigate some of the impact from further rate cuts by the central bank, the report said.
China’s banking industry faces renewed risks as the nation’s property transactions and prices have fallen after Beijing’s clampdown on highly leveraged developers and easy credit last year. The world’s second largest economy expanded 4.0% in the fourth quarter of 2021, down from 4.9% growth in the previous quarter.
The nation’s 2022 GDP growth target of around 5.5%, outlined at China's annual political meetings that ended March 11, indicated that more policy easing is ahead, analysts said. The People’s Bank of China has cut banks’ reserve requirement ratios and benchmark interest rates, or loan prime rates, among other measures, since late 2021.
The major Chinese banks said in separate pre-earnings statements issued early March that, during the first two months of 2022, they were “adjusting to changes in external environment” and “[reasonably] positioned” with “better than expected” and “steadily progressing” performance in core businesses.
Central bank paces itself
“The weaker-than-expected February financing, which is against the top-level policy of steady growth, increases the probability of cuts in interest rate and reserve requirement ratio in order to avoid credit collapse,” said Yin Weiqi, macro analyst at Dongguan Securities Co. Ltd.
New yuan loans fell to 1.23 trillion yuan in February from 3.98 trillion yuan in January, according data from the People's Bank of China. The year-over-year growth of outstanding yuan loan balance of the banking system slowed further to a new 15-year low of 11.4% in January, according to the data.
But Iris Pang, chief economist of Greater China at ING Bank NV, said the central bank may pause on rate cuts for a bit based on the latest retail sales data. China’s retail sales rose 6.7% in the first two months from the same period last year, slowing from 12.5% growth a year earlier, but the reading shows “retail sales strength was even more notable during a period of strict people flow control during the Chinese New Year holidays.”
The central bank does not seem to be in a hurry to cut interest rates based on the latest macroeconomic data, which plays a bigger role than concerns over bank margins in monetary policy, said Ye Bingnan, an economic analyst at CMB International Global Markets Ltd.
As of March 18, US$1 was equivalent to 6.36 Chinese yuan.