A potential slowdown in loans and continued pressure on margins amid low interest rates may dampen earnings growth at major Chinese lenders in the coming quarters, after the four largest domestic banks posted low single-digit gains in net profit in the first three months of 2021.
But there is a silver lining: the so-called Big Four reported flat or lower nonperforming loan ratios compared with the previous quarter. Analysts say asset quality will likely improve further, albeit gradually, as the world's second-largest economy has so far remained ahead of its peers in emerging from the coronavirus pandemic and Beijing has extended payment holidays for struggling borrowers to the end of 2021.
In the three months ended March 31, China Construction Bank Corp.'s net profit growth was the highest among the quartet, up 2.80% on the year. It was followed by an increase of 2.67% at Bank of China Ltd., 2.61% at Agricultural Bank of China Ltd. and 1.46% at Industrial & Commercial Bank of China Ltd. Analysts said the results were largely in line with expectations.
"We expect a moderate slowdown in loan growth as well as selective credit measures and disparate tightening, without raising overall lending costs for borrowers," Bruce Pang, head of macro and strategy research at China Renaissance Securities (Hong Kong), told S&P Global Market Intelligence.
Banks have been the primary financiers of China's post-pandemic economic recovery as well as a much-needed lifeline for struggling businesses and local governments. Under Beijing's directive, the major banks have been lending more but at lower interest rates, while setting aside billions of yuan as provisions for troubled loans, leading them to report some of the lowest profit growth in years.
But the wind has changed since late March, when the People's Bank of China asked major banks to curtail loan growth for the rest of the year to preempt systemic risks, according to a Bloomberg News report. In March, the nation's outstanding bank loans grew 16.37% year over year to a fresh record of 186.44 trillion yuan, according to data from the central bank.
Lending vs. margins
In the first quarter, the loan books of the Big Four expanded as they continued to lend more.
AgBank's outstanding loans grew 5.95% to 15.419 trillion yuan from a year earlier, followed by 5.49% growth at BOC, 5.24% at CCB and 4.58% at ICBC.
However, continued margin contraction in the first quarter offset some gains from stronger lending. BOC posted the steepest decline in net interest margin, down 7 basis points to 1.78% from 2020-end. CCB's NIM fell 6 bps to 2.13% during the same period, while ICBC's margin fell 1 basis point. AgBank did not disclose its NIM.
In addition to the government's call to charge lower interest rates, banks have also been migrating to the new benchmark lending rates — the one-year and five-year loan prime rates — in pricing new mortgages and corporate loans. The new rates, which reflect market liquidity in a more timely manner, are lower than the previous benchmarks, essentially reducing yields on loans across the board.
Although NIMs may hover around current levels as loan prime rates stay stable, banks have been trying to boost the overall returns on their interest-bearing assets, hoping to mitigate some of the margin pressure.
"Thanks to retail transformation and private banking [and] wealth management expansion, big banks can cut interest-bearing liabilities cost by growing demand deposits, and develop a strong client base for [their] wealth management products as well as improve interest-earning assets yield and NIM," Pang said.
As of end-March, CCB's deposits from customers grew 7.35% to 22.130 trillion yuan from 2020-end. That was followed by a 7.25% growth at AgBank during the same period, 6.76% at BOC and 3.22% at ICBC.
Delayed credit risk
The NPL ratio is another metric in which all banks have shown improvement in the first quarter, although the credit risk might have been delayed, not resolved.
As of March-end, BOC's NPL ratio fell to 1.30% from 1.46% at the end of 2020, while that of AgBank fell 4 bps to 1.53% during the same period. ICBC and CCB's NPL ratios stabilized at the previous quarter's levels at 1.58% and 1.56%, respectively, after rising for at least four consecutive three-month periods.
"Banks still need to monitor medium and long-term credit risk exposures," Pang said. "When China's economy and credit expansion continue to see high growth, NPL may not be a big problem. Yet, the story is changing as China is tightening credit conditions in a bid to balance [between] supporting growth and containing risks."
As of April 28, US$1 was equivalent to 6.48 Chinese yuan.