China's largest bank says asset quality pressure growing, but still manageable

Industrial & Commercial Bank of China Ltd. said asset quality pressure has increased, but its impact will likely "remain manageable," after the lender's nonperforming loan ratio rose to its highest in four years in 2020 as some parts of the Chinese economy are still struggling to recover from the coronavirus pandemic.

Although the largest lender in the world by assets beat market expectations to report a 1.2% rise in 2020 net profit, ICBC's NPL ratio rose to 1.58% as of 2020-end, the highest level since 1.62% as of 2016-end.

Much of the default pressure came from short-term corporate borrowers, with the segment's average NPL ratio rising to 4.95% from 4.42% a year earlier, according to the bank's March 26 earnings report. But other borrowers have shown signs of improving repayment ability. The NPL ratios of personal loans and personal business loans declined to 0.56% and 1.30%, respectively, from 0.61% and 2.23% a year earlier.

The amount of so-called special mention loans, which are at risk of becoming nonperforming, dropped 50 basis points to 2.21% of the bank's entire loan book, which grew 11% in 2020.

"When we look at the trend of China's economy, the recovery is stable, and the pandemic is under control. This confidence will help production recover, thus mitigating COVID-related liquidity pressure on the borrowers," ICBC's senior executive vice president, Jingwu Wang, told a teleconference March 26.

Loan defaults remain a concern for Chinese banks. Since the outbreak of COVID-19, they have heeded the government's call to lend more, and at lower interest rates, to less creditworthy companies that need funding to survive the pandemic, and to allow vulnerable borrowers to skip repayment of principal and interest until the end of 2021.

But as China pulls ahead of other major economies in recovering from the pandemic, and due to the nation's recent strategic pivot toward technological self-reliance and net-zero emissions, analysts broadly expect strong loan growth and improving margins from lending will likely drive Chinese bank earnings to a stronger 2021.

According to the S&P Capital IQ consensus estimate, China's four largest commercial banks by assets are all likely to report record-high EPS in 2021. ICBC's normalized and GAAP EPS for 2021 is forecast at 87 fen, China Construction Bank Corp. at 1.07 yuan, Bank of China Ltd. at 61 fen and Agricultural Bank of China Ltd. at 60 fen.

China Construction Bank is due to announce its full-year earnings by March 29. The S&P Capital IQ consensus estimate for 2020 normalized and GAAP EPS was 1.01 yuan, down from 1.05 yuan in 2019.

Bank of China, another major Chinese lender whose full-year earnings are due March 30, is expected to report normalized and GAAP EPS of 59 fen for 2020, down from 61 fen reported in 2019, according to the S&P Capital IQ consensus estimate. Agricultural Bank of China is also expected to post marginally lower normalized and GAAP EPS of 58 fen for 2020, compared with 59 fen a year earlier, according to the estimate.

Strong loan growth

Loan growth in China has picked up significantly since the beginning of 2021, while the banking sector's net interest margins and NPL ratios have been improving since the fourth quarter of 2020, albeit marginally, according to the regulators.

The latest data from the People's Bank of China show that outstanding yuan loans reached a fresh record of 183.60 trillion yuan as of February-end. It was up 16.7% from the same month in 2019, the highest year-over-year growth in recent years.

"In light of the strong credit demand witnessed in the February aggregate financing data, we believe interest rates of bank loans could edge up moderately in 2021," Nomura analysts Shengbo Tang and Ivy Du wrote in a March 21 note.

The banking sector's aggregate net interest margin edged higher to 2.10% in the fourth quarter of 2020 from 2.09% in the previous quarter, according to the China Banking and Insurance Regulatory Commission, or CBIRC.

ICBC's net interest margin in 2020 was 2.15%, the lowest in four years. President Lin Liao told the March 26 conference that was partly because the average interest rate on new loans fell 39 basis points in 2020, aligning with the government's supportive policies for businesses. The bank has also increased its investment in bonds to reduce its clients' funding costs, Liao said.

Despite a spate of high-profile bond defaults by state-linked companies in China in the fourth quarter of 2020, the banking sector's aggregate NPL ratio slid to 1.84%, the lowest since 1.81% in the second quarter of 2019, according to the CBIRC.

The Chinese Cabinet's March 24 decision to extend the moratorium on inclusive loans for small businesses to the end of 2021 from March-end is expected to mitigate delinquencies of borrowers. The government will also continue offering up to 40% of the loan principal as financial support for banks that aggressively lend to small businesses, a policy that analysts expect to encourage lending while reducing the lenders' funding costs, thus helping their net interest margins.

As of March 25, US$1 was equivalent to 6.55 Chinese yuan.