Chinese megabanks reported steady earnings in the third quarter even as they face sluggish loan demand, especially from the household sector, where property sentiment remains weak.
Industrial and Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd., the biggest Chinese lenders by assets, reported steady gains in net profit in the quarter ended Sept. 30 as lending growth offset a squeeze in interest margins. Although economic growth picked up in the third quarter, loan demand will likely slow in the coming months.
Aggregate lending growth remained steady at 11% in the first half of the year, but the loan demand index, published by the People's Bank of China, declined, S&P Global Ratings said in a note on Oct. 21, before results were announced. "Also, considering the industry practice of lending more in the first half of a year, we expect a slowdown of loan growth in the second half of the year," Ratings said.
China's economy grew 3.9% year-over-year in the July-to-September quarter, bouncing back from the 0.4% expansion in the previous three months. Chinese authorities are seeking to accelerate lending after the COVID-19 pandemic and a property sector slump strained the world's second-biggest economy. The nation's four megabanks reported between 4.83% and 8.6% year-over-year growth in net profits for the third quarter, slightly higher than in the first half of 2022.
Corporate loan demand
Loan demand from the corporate sector will likely pick up slightly in the final quarter of 2022 amid an expansionary monetary policy, according to an Oct. 27 research note by Shenzhen-based Guosen Securities. Household demand will remain sluggish amid poor sentiment in the property market, according to the note.
The central bank has cut its benchmark one-year loan prime rate twice and its five-year rate three times this year to maintain support for the economy. Still, new loans in the banking industry rose by 1.23 trillion yuan in the third quarter, 540 billion yuan less than last year's growth, according to Guosen Securities.
All four state-owned lenders reported, however, double-digit loan growth – from AgBank's 12.8% to BOC's 10.7% – during the first nine months this year. Net interest margin, a key measure of banks' ability to generate profit from lending, continued to grind lower at most banks.
ICBC's NIM declined to 1.98% during the third quarter, from 2.03% in the first half, while AgBank reported a decline in NIM to 1.96% during the third quarter, from 2.02% in the first half amid the fall in lending rates. BOC was the only lender among the four megabanks with a stable NIM.
Steady incomes
ICBC, the world's biggest bank by assets, reported that its net profit rose 6.76% year-over-year in the third quarter to 94.32 billion yuan, while earnings of CCB grew by 8.61% to 85.64 billion yuan. BOC reported 4.83% year-over-year growth for third quarter net income to 53.16 billion yuan, slowing from the 6.3% in the first half due to decline in fee and commission incomes.
ICBC said its nonperforming loans ratio stood at 1.40% at the end of the third quarter, down 2 basis points since the start of the year. Its allowance to NPL ratio rose 0.96 percentage point over the period to 206.80%. AgBank also reported an NPL ratio of 1.4%, down 3 basis points from nine months ago, with coverage ratio 302.65%, up 2.92 percentage points.
Banks could see elevated policy risks relating to lending, pressure to sacrifice profits and investor concerns over asset quality as economic weakness may persist in 2023 due to the slowdown in global growth, the weakness of the property sector and COVID-19 related uncertainties, said Michael Chang, banking analyst at CGS-CIMB Securities (Hong Kong) Ltd., in a research note dated Oct. 25.
With their sizable buffers for provisioning and NPL recognition built up in the past years, banks can adequately withstand multi-year weaknesses in net interest margins and fee income, Chang said.
As of Oct. 28, US$1 was equivalent to 7.25 Chinese yuan.
