Major Chinese banks expect recovering loan demand in 2022 to mitigate the impact of further decline in net interest margins, while setting aside more buffers against bad loans despite improving asset quality.
Agricultural Bank of China Ltd. and Bank of China Ltd. said their loan books will likely expand by more than 10% in 2022, after growing 13.2% and 10.5% in 2021, respectively. China Construction Bank Corp. expects its loan portfolio to grow "reasonably" this year, while Industrial & Commercial Bank of China Ltd. did not offer forecast on loan growth. These lenders reported loan growth of 11.9% and 11.0% in 2021, respectively.
As of end-2021, the net interest margins of Agricultural Bank, ICBC, Bank of China and China Construction Bank were largely unchanged from the previous quarter but were down by between 4 bps-10 bps from a year earlier, according to the banks' full year earnings announcements released March 29 and March 30.
"The NIM will likely decline a little bit further this year as overall lending interest rates may fall and deposit interest rates may still be stubbornly high amid fierce competition. This is a situation facing all Chinese banks," Zheng Min, executive vice president at China Construction Bank, told a press conference March 30.
The decline of NIMs at the nation's largest commercial banks has slowed in the second half of 2021 after trending downward in recent years. However, pressure on margins is coming back as Beijing has stepped up easing efforts to prop up the slowing economy since late last year, including lowering banks' reserve requirement ratio and two benchmark lending rates.
"Most banks are able get their interest margins under control despite persisting pressure by optimizing their asset-liability structure," according to Lin Jinlu, Beijing-based banking analyst at Dongxing Securities Co., Ltd.
Beijing will likely roll out more measures, such as lifting some restrictions on lending to the property sector and a policy rate cut of 10 bps within the next two months, to stimulate its economy to reach its 2022 growth target of around 5.5%, said UBS Economist Wang Tao in a report published March 29. These easing efforts could help mitigate the impact of the downturn in the real estate sector and lingering pandemic-related restrictions, Wang said.
So far, loan growth has not picked up as the Chinese government had hoped. The outstanding loan balance of China’s banking system grew 11.01% in February from a year earlier, the lowest year-over-year growth rate in more than 15 years, according to data from the People's Bank of China.
Conservative provisioning
While all four largest Chinese banks reported lower nonperforming loan ratios in 2021, ICBC and Agricultural Bank appear more conservative than two others in terms of loan loss provisioning.
ICBC’s loan loss provisions increased 13.7% in 2021, up from the year-over-year growth of 11.0% in the previous year. Agricultural Bank's provisions growth also sped up to 16.6% in 2021 from 14.3% in 2020. Their NPL ratios fell to 1.42% and 1.43% as of end-2021, respectively, from 1.58% and 1.57% as of end-2020.
Meanwhile, China Construction Bank’s provisions grew 14.6% in 2021, slightly less than a 15.3% growth in 2020. Its NPL ratio also dropped to 1.42% from 1.56% during the same period.
However, Bank of China’s provisions grew more slowly in 2021, up 5.9% after rising 13.1% in 2020. The lender’s NPL ratio fell to 1.33% from 1.46%.
“Credit cost could remain elevated over the next 24 months,” S&P Global Ratings said in a March 30 research note. “Property deleveraging in China, potential spillover effects from the Russia-Ukraine conflict, and the ongoing pandemic are reasons for prudence.”
The latest results indicate improving asset quality, and downward pressure will likely be modest as risk from the property sector is being contained, Dongxing’s Lin added in the research note.
“We expect asset quality and credit cost to be largely steady this year despite the lingering pandemic and geopolitical risk,” Cheng Yuanguo, chief risk officer at China Construction Bank, said March 30. The bank’s NPL situation will remain manageable despite “inevitable risk exposure to certain property developers," Cheng said.
As of March 29, US$1 was equivalent to 6.36 Chinese yuan.