Chinese banks' earnings will likely stay steady in 2022 despite economic uncertainties facing the world's second largest economy, as the central bank's calibrated easing will help ease pressure on margins.
Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd., the biggest four lenders by assets, reported mid-single-digit earnings growth in the first quarter of 2022, buoyed by steady net interest margins and an average 5% growth in loans with stable asset quality. Earnings of smaller peers, such as China Merchants Bank Co. Ltd. and Industrial Bank Co. Ltd. hit double-digit growth in the first quarter.
"Further room for NIM contraction will likely be limited in the coming quarters," said Liang Fengjie, Shanghai-based banking analyst at Zheshang Securities Co., Ltd., as the slide in lending rates will ease amid the recovery of loan demand in the post-lockdown period and the central bank's mechanism to ensure that banks stay reasonable with rates they offer on deposits.
China's GDP grew 4.8% year over year in the first quarter, falling short of the 5.5% target set at the annual policy meeting of the ruling party in March. Early macroeconomic indicators are pointing at a further slowdown, dragged by a disruption in global supply chains and lockdowns following by an outbreak of COVID-19 infections in the key cities of Shanghai and Beijing.
Falling rates
The Peoples' Bank of China, or PBoC, lowered its benchmark lending rates twice, and the amount of funds banks need to set aside as reserve three times, in the past 10 months to support the economy. However, the central bank belied market expectations and held policy rates steady in April, an indication of a measured policy response to the slowdown.
"Stability remains the prime goal of China's policy makers who are attempting to strike a balance between banks' profits and supporting the real economy at the same time," Liang said.
Financial institutions in the country extended aggregate loans of 8.34 trillion yuan in the first quarter, according to PBoC data, up 8.6% from the same period last year.
China's loan growth is likely to stabilize at about 10% over 2022 and 2023 from an average of around 12% in the previous two years during the economic fallout from the pandemic, said Ming Tan, director, financial institutions, at S&P Global Ratings.
The PBoC will keep credit supply and social financing growing at a steady pace to counter COVID-19 and geopolitical challenges, the central bank said in its Monetary Policy Execution Report released May 9.
"[The] PBoC's downward-guiding on both lending and deposit rates, instead of one-sided policy rate cut, would better preserve banks' NIMs," said Zhang Yiwei, banking analyst at China Galaxy Securities. That will boost banks' willingness to lend, Zhang said.
Asset quality
Asset quality metrics remained resilient in the first quarter across the so-called big four lenders, with a nonperforming loan ratio at around 1.4%. Agricultural Bank of China reported an NPL coverage ratio of 307% as of the end of the first quarter, and Bank of China reported a ratio of 188%.
"It is now possible for banks to be less aggressive in making provisions on the back of improving asset quality and the already abundant set-aside for bad debts," Zhang said, which could help their net profits. Large lenders, such as the big-four, have even greater room, the analyst added.
Property-related loan growth continued to slow, however. In response to the sluggish property sector and economic slowdown, the PBoC on May 15 allowed banks to offer a 20 basis points discount over the 5-year loan prime rate, or LPR, of 4.60% to first-time homebuyers, from a minimum rate on par with the LPR previously. For second-timers, the minimum mortgage rate remains unchanged at 60 bps above the LPR.
Only five cases of default were recorded in the first week of May, involving total amount of 20 billion yuan, which was slightly higher than the week before, and China Evergrande Group was only private developer on the list, according to the brokerage firm.