The asset quality outlook of Chinese banks is clouded by the lingering pandemic and ongoing trade tensions between China and the U.S., after two major lenders reported lower nonperforming ratios but set aside more provisions to cover future loan losses in the second quarter.
Industrial & Commercial Bank of China Ltd., the world's largest bank by assets, said its end-June NPL ratio dropped 4 basis points to 1.54% from the previous quarter. It was the first quarter-over-quarter decline since the nation reported its first case of COVID-19 in late-2019. The NPL ratio for Bank of Communications Co. Ltd., the country's fifth largest lender by assets, also decreased for the second consecutive quarter to 1.6% as of June 30, the lowest in more than a year.
However, the banks' bad loan ratios are still higher than their pre-pandemic levels. ICBC's NPL ratio stood at 1.43% as of end-2019 before the pandemic was in full swing, while Bank of Communications' ratio was at 1.47%.
ICBC also set aside 590.95 billion yuan as provisions to allow for uncollected loans and loan payments. The amount was equivalent to 191.97% of total outstanding balance of NPLs, up from 180.68% as of end-2020. Bank of Communications also earmarked loan-loss provisions equivalent to 149.29% of total NPL balance in the first half, up from 143.87% as of end-2020.
"The key three external uncertainties are the pandemic, trade relations and the normalization of monetary and fiscal policy for major economies after quantitative easing. [In the domestic market], we also saw that in the second quarter, the recovery of consumption is not stable yet and the pressure on export still exists due to uncertainties in the global market," Liu Jun, President of Bank of Communications, told a press conference on Aug. 27.
The recent outbreak of the delta variant has led some economists to downgrade their projection of China's economic growth, as massive lockdowns across the country aimed at containing the spread of the virus will likely take steam off the recovery of the world's second-largest economy. Beijing's ongoing crackdown of some of the fast-growing sectors such as real estate, online education and gaming due to systemic risk and social concerns will also likely impede bank lending, corporate investments and household consumption.
"The provisioning coverage is likely to rise for these two banks, on the basis that NPL ratios are falling. In addition, the banks will likely say that, due to there still being uncertainties with respect to the economic environment, it is better to be conservative or cautious and increase provisioning buffers," said Michael Chang, a Hong Kong-based China financial analyst at CGS-CIMB Securities.
"The expectation is that NPL ratios are likely to trend down. Given their relatively low level of NPL ratios, however, the trend is likely to be gradual," he added.
The improvement of ICBC's overall asset quality in the second quarter was largely driven by lower defaults of personal loans and residential mortgages. The NPL ratio of personal loans fell to 0.48% as of June 30 from 0.56% as of end-2020, and that of residential mortgages dropped to 0.24% from 0.28%. These two types of loans combined accounted for 68.1% of ICBC's total loan book of 19.997 trillion yuan.
Even as moratorium extension and repayment flexibility for vulnerable borrowers will expire at the end of this year, ICBC senior executive vice president Wang Jingwu said the lender's NPL ratio will likely remain on a downtrend in the second half.
"The nonperforming loan risk is stabilizing and manageable. Many borrowers under moratorium had started repayments; as China's economic outlook improves steadily and the pandemic remains under control, repayments are likely to come in even more quickly in the second half," Wang said.
In addition to lower NPL ratio, ICBC's special mention loans, another forward indicator of loans that are at risk of becoming nonperforming, fell 6.4% to 385.36 billion yuan as of June 30, from 411.90 billion yuan as of end-2020.
Bank of Communications also said the NPL ratio for small and micro enterprises stood at 1.51% at the end of June, down 0.67 percentage point from the end of 2020.
Yin Jiuyong, the bank's executive vice president, said the bank's nonperforming loans mostly came from sectors including warehousing, transportation and real estate. In the future, Yin said the bank will decrease its exposure to some businesses especially those more affected by the pandemic and policy changes, such as real estate and restaurants.
Apart from lower defaults by these customers, Bank of Communications also disposed of 43.718 billion yuan of nonperforming loans during the first half, up by 9.395 billion yuan from a year earlier.
"Our asset quality has steadily improved in the first half of this year... as we disposed more nonperforming assets and strengthened risk categorization. In the second half, we will continue to dispose the existing bad loans and control the inflow of new risks," Yin said in an earnings call on Aug. 27.
This echoes what has been done by many commercial banks in China. In the first quarter of 2021, Chinese banks have disposed of 482.7 billion yuan of nonperforming assets after a record disposal of 3.02 trillion in 2020. "We expect a higher level of disposal for the first half as well," Liu Zhongrui, an officer of the China Banking and Insurance Regulatory Commission said in a press conference on July 14.
As of Aug. 26, US$1 was equivalent to 6.48 Chinese yuan.