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Latest China bank loan data suggest default risk might have moderated

Long-term loans to Chinese companies and advances to small businesses grew at the fastest rates in more than two years, indicating Beijing's years-long efforts to redirect liquidity to the real economy have started taking effect.

Although the Chinese banks' earnings will likely remain under pressure in 2020, analysts believe the data suggest the default risk of bank loans might be lower than it seemed earlier this year. They say China's economic recovery appears to be on a firmer footing, as credit demand is driven more by the manufacturing, infrastructure and private sectors, instead of real estate and investments in stocks and bonds as in the previous economic cycles.

As of June 30, outstanding medium and long-term loans to corporations rose 13.4% from a year earlier to 62.22 trillion yuan, according to data released by the People's Bank of China on July 31. It was the highest year-over-year growth rate since the first quarter of 2018 when such loans increased 14% from a year earlier.

The outstanding amount of the so-called inclusive lending, in which individual credit lines are no more than 10 million yuan each, increased 26.5% to 13.55 trillion yuan as of end-June from a year ago, according to the PBOC. That was also the biggest on-year growth since the central bank started disclosing quarterly bank loan data at the beginning of 2018.

"We think that banks' asset quality can be improved on the back of the improving quality of China's economic recovery, which is more [reliant] on industrial upgrading and resilient consumption...than [on] the property sector," Bruce Pang, Head of Macro and Strategy Research at China Renaissance Securities, told S&P Global Market Intelligence.

Strong loan growth

As of end-June, total outstanding yuan loans at Chinese financial institutions rose 13.2% from a year earlier to 165.20 trillion yuan, a new record, according to the central bank. Outstanding loans to nonfinancial enterprises and government departments and organizations grew 12.8% from a year earlier, the second-highest pace since the beginning of 2019.

SNL Image

SNL Image

In a bid to revive the economy that was first hit by global trade tensions and then by COVID-19, Beijing has been pushing banks to lend more aggressively, especially to projects and small businesses that have weaker credit profiles.

DBS Bank expects yuan loans to rise between 13.5% and 14% this year, while inclusive lending may keep pace its with 25% to 30% growth. "As banks are required to support China economy recovery and [the] PBOC continues to keep market liquidity ample, China banks will distribute more loans in [the second half of 2020] on the back of increasing deposits and injecting capital to support loan capacity," Cindy Wang, a China banking analyst at DBS, said in comments emailed to S&P Global Market Intelligence.

Since early 2018, the Chinese central bank has cut banks' required reserve ratios multiple times, and has gradually lowered the benchmark interest rates in order to bring down funding costs. The government also allowed banks to postpone the recognition of some of the nonperforming loans that are under moratorium or restructuring, and launched a state-sponsored credit guarantees for small and medium enterprises to share lending risk with financial institutions.

Iris Pang, Greater China economist at ING Bank, said banks in general will still be less willing to lend to small businesses and projects that are deemed too risky. Meanwhile, lending to infrastructure projects, which was one of the drivers of long-term corporate lending, is likely to continue to grow in the second half of 2020, lending support to the nation's economic recovery.

Tough year for banks

Pang from China Renaissance expects inclusive lending and loans to the manufacturing sector will likely continue to grow in the second half of 2020, although the interest rates on those loans may fall further. The government has said the banks should "give up 1.5 trillion yuan of profit to the real economy this year."

Nomura said in a July 31 research report that 2020 will be a "tough year" for Chinese banks, as their earnings will start showing the pressure from increasing loan-loss provisions as well as lower net interest margins. Dividend payouts, especially among large state-owned banks, may come under pressure this year.

For the nation's largest banks by assets, their net interest margin will likely drop by an average of 1.9 basis points for every 10-basis-point drop in their lending interest rates, the brokerage said.

It also expects net profit of Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd. to fall 1% in 2020 from a year earlier, after rising 4.9%, 4.7% and 4.6% in 2019, respectively.

As of Aug. 4, US$1 was equivalent to 6.97 Chinese yuan.