China’s big banks see slowing profit growth after weak loan demand hurt first-quarter results

China’s big banks are facing pressure after weak first-quarter profit growth, with weak credit demand outweighing modest improvements in net interest margins.

Among the four largest commercial banks in the country, Agricultural Bank of China Ltd. posted the strongest net profit growth of 7.4% for the three months ended March 31 over the prior year. Bank of China Ltd. came in last, with profits up 5.6% year-on-year. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. saw their net profit increase by 5.7% and 6.8% respectively compared to the previous year.

“Credit demand, already affected by the ongoing COVID-19 lockdowns, is likely to remain weak in the second and third quarters,” said Eric Wang, Shanghai-based banking analyst at CMB International Capital Corp. ltd.

Easing monetary conditions and weak loan demand are dealing a double blow to Chinese banks. The latest round of citywide shutdowns to contain the pandemic have posed another challenge to the world’s second-largest economy which began to slow in late 2021 amid waves of property developer defaults.

China’s Politburo, the country’s top leaders, said after an April 29 meeting that authorities would step up stimulus and contain the COVID-19 outbreak, aiming to meet China’s annual GDP growth target. about 5.5%. They called for using all sorts of monetary policy tools, in addition to measures aimed at boosting domestic demand, including infrastructure investment, as well as loosening its grip on the property market.

The meeting sent “clear signals of additional policy support” and “further reduced the risk of slower growth,” Tao Wang, head of Asian economics and chief China economist at UBS, said in a statement. a note published on April 29.

Sluggish credit application

Despite easing cycles, so-called Big Four loan growth remained largely unchanged from a year ago. Agricultural Bank posted the strongest year-over-year loan growth of 5.7%, while ICBC came in last with loan growth of 4.5%.

Smaller banks experienced steeper declines in loan growth. China Merchants Bank Co. Ltd., for example, posted loan growth of 3.4% in the first quarter, compared with 5.6% a year earlier.

China’s loan growth in the first half of this year will be driven by monetary easing and increased fiscal support for the economy, according to Iris Tan, banking analyst at research firm Morningstar.

The People’s Bank of China has cut its policy rates twice and its reserve requirement rate three times in the past 10 months. Further cuts are expected by economists to support economic growth. China’s GDP growth in the first quarter was 4.8% and demand for credit did not increase amid the economic slowdown.

Easing pressure on margins

The Big Four’s net interest margin ranged from 1.74% to 2.15% in the first quarter, virtually unchanged from the previous quarter.

“The pressure on NIM is likely to ease in 2022,” said Eric Yang Bo, deputy managing partner of China Financial Service at Deloitte, amid little room for further policy rate cuts and ample liquidity. which reduces the cost of funds.

A reduction in the interest rate cap on deposits in mid-April helped protect NIMs from lenders, CMB International’s Wang added.

Rising credit risk

The Big Four saw their non-performing loan ratios stabilize in the first quarter. The Bank of China’s NPL ratio came in at 1.3% and three others reported ratios of 1.4%.

Asset quality, particularly in the manufacturing and export sectors, may deteriorate slightly before improving again in the fourth quarter, according to CMB International’s Wang. He estimated that the sector-wide bad debt ratio would increase by 5 basis points from the current level of around 1.8%.

That said, Tan said banks’ overall asset quality was holding up well despite the still-sluggish real estate sector. She expects further policy easing to help restore market confidence and boost loan demand.