Mar 30, 2023
China’s Big Banks See Profit Gains Despite Slowing Economy
(Bloomberg) -- China’s biggest state-owned banks warned of a tough 2023 as uncertain economic conditions may squeeze earnings after most delivered better-than-estimated profit growth for last year.
China’s tightly controlled $54 trillion banking industry was pushed to extend more credit in 2022 to help cushion the economy from a slowdown triggered by the nation’s strict pursuit of Covid zero, which helped lift profits last year even as margins narrowed.
The Covid policy, abandoned in late 2022, had weighed on economic growth and sapped consumer confidence. The impact from that could continue to play out into this year for the banks’ bottom lines, a bank executive warned.
“Profits in the banking sector tend to lag behind the economic cycle,” said Lin Hua, chief risk officer at Bank of Communications Co., at a Thursday briefing. “We expect earnings in 2023 to be challenged by shrinking demand, supply shocks and weakening expectations.”
Industrial & Commercial Bank of China Ltd., the country’s biggest lender by assets, said Thursday net income rose 3.5% to 360.5 billion yuan ($52.6 billion), short of analysts’ estimates. Other banks topped or met forecasts, including Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co.
Here’s a summary of key earning compared with previous year:
Analysts are cautious about the outlook for banks. Although China’s economic activity is rebounding this year after lifting Covid restrictions — with banks extending a record amount of new loans in January — headwinds still exist.
The state-owned banks posted a 13% decline in pre-provision operating profit, which is income before accounting for funds set aside for bad debts, in the last quarter of 2022 — the worst quarter since 2010, Shujin Chen, an analyst at Jefferies Financial Group Inc., said in a note to clients.
Most of the banks also reported deteriorating net interest margins, a measure of profitability that will likely fall further in 2023.
May Yan, an analyst at UBS Securities, said the net interest margin decline at the big four banks in the fourth quarter was much larger than expected. NIM pressure will persist this year but a potential cut in deposit rates led by big banks may help alleviate the pressure, she said.
Factors for the downward pressure could be a potential loan prime rate cut this year, coupled with China’s push for state lenders to lower borrowing cost for small businesses and home buyers, Bloomberg Intelligence analyst Francis Chan said in a note Thursday.
China Construction Bank’s Chief Financial Officer Sheng Liurong said Thursday that management is taking the shrinking net interest margin “very seriously” and is focused on strategies to improve it.
A persistent slump in the property market has also impacted business, with the non-performing loan ratio on real estate surging at most banks.
China’s financial system has been largely insulated from the global banking turmoil of recent weeks. Executives at China Construction Bank and Bank of Communications said Thursday they have seen very limited impact from the turbulence at Silicon Valley Bank and Credit Suisse Group AG.
“We’ll draw the lessons from the recent banking crisis in EU and the US and further optimize our risk management,” CCB President Zhang Jinliang told reporters.
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