Chinese banks’ earnings to remain under pressure in fourth quarter: analysts

China’s big banks are likely to face further pressure on their revenues and interest margins in the fourth quarter, as the world’s second-largest economy battles an ongoing property sector crisis and low consumer confidence, analysts said.

Consumption has not bounced back as quickly as expected after Beijing scrapped its zero-Covid policies last year, and loan growth is still under pressure, said Kenny Tang, chairman of industry body The Hong Kong Institute of Financial Analysts and Professional Commentators.

“Right now, even though there is decent growth in private financing, the M2 money supply and new loans on the Chinese mainland, the problem is that the money has not reached the real economy,” he said. “This is because businesses and consumers are still quite pessimistic about the outlook for China’s economy.”

M2 refers to the entire stock of liquid assets in an economy, including cash and current account deposits. It is a key liquidity gauge and the intermediate target of the Chinese central bank’s monetary policy.

China’s total household loans increased by 392 billion yuan (US$54.7 billion) in August, driven by an increase of 232 billion yuan in short-term loans and 160 billion yuan in medium to long-term loans, respectively. Excluding single-month fluctuations, household loan growth weakened to 6.8 per cent year on year, Morningstar analysts said in a report this week.

“Recent sluggish data, including household disposable income, consumer confidence and the unemployment rate, also pointed to a continued softness in consumption credit demand,” the report said.

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Meanwhile, China’s big banks are poised to absorb additional non-performing loans (NPLs) from property developers despite mounting default risks. NPLs are a measure of banks’ exposure to delayed or missed loan payments that could dent profits.

For instance, Agricultural Bank of China, Industrial and Commercial Bank of China and China Construction Bank are among lenders that have loans worth 70 billion yuan on their books made to embattled private developer Country Garden Holdings, according to industry sources. The developer said on Tuesday that it had failed to pay overdue debt and would not be able to service all of its offshore borrowings on time.

“Even though NPL ratios are relatively high for China’s big banks – almost 7 per cent for some joint-stock banks – the ratios remain quite stable compared to the previous year,” said Kenny Ng, a securities strategist at Everbright Securities International. “And as the economy slowly recovers, banks will see more loan growth, which will give them more capacity to absorb property bad loans.”

Cumulative property NPLs could reach 10 to 15 per cent of developer bank loans, and banks could take around three years to digest related losses, Morningstar said. This would lead to 0.2 to 0.4 trillion yuan in net losses per year.

“Such pressure should be manageable when compared with the 206 per cent provision coverage, 6.6 trillion yuan NPL reserve and the average 3 trillion yuan NPL digestion per year during 2020-22,” the Morningstar report said.

These banks are also expected to roll out further measures, including interest rate cuts and existing mortgage rate repricing, to support the economy and restore consumer confidence.

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“I think there is a good chance that the reserve requirement ratio will remain steady, since the central bank already lowered it in September,” Ng said. “Since the reserve ratio is usually adjusted alternately with lending rates, we could see further cuts to the one-year and five-year loan prime rates [LPRs].”

The one-year LPR is a medium-term lending facility used for corporate and household loans, while the five-year LPR is a peg for mortgages.

“While [these measures] could help to lower credit risk concerns, [they] translate into prolonged and larger-than-expected downward pressure on net interest margins, which [become] the main drag for Chinese banks’ earnings for the rest of 2023 and probably into 2024,” said Iris Tan, a senior equity analyst at Morningstar.