Improving margins and asset quality in China’s banking sector amid the country’s economic recovery set the stage for lender earnings to rebound further this year, analysts said.

Analysts are increasingly optimistic about Chinese banks, some of which saw sharp declines in profits in the first half of 2020, after the world’s second-largest economy managed to grow 2.3% at the end of last year.

The stronger-than-expected recovery helped the aggregate net interest margin of all Chinese commercial banks to increase slightly in the fourth quarter of 2020, the first increase in three quarters, according to the latest data from the China Banking Regulatory Commission. insurance. The industry’s aggregate NPL ratio fell for the first time in two years.

“Chinese banks could see their profits rebound thanks to a broader economic recovery, a phased out of repayment programs as well as less expensive deposit products under regulatory measures, which will support revenue growth with a margin of improvement. ‘more stabilizing net interest,’ said Bruce Pang, head of macro and strategic research at China Renaissance.

As Beijing pushes banks to lend more to fuel the economic recovery, regulators have attempted to contain their funding costs in order to make lending easier, which has also relieved some pressure on their net interest margins. For example, the People’s Bank of China reportedly cut interest rates on high-yield structured deposits, a growing source of funding for banks in addition to deposits, in January.

Pang added that China’s central bank is unlikely to further lower benchmark lending rates, or prime lending rates, which also eases pressure on bank margins as the recovery gathers pace. The one-year and five-year LPRs remained unchanged for nine consecutive months.

Salvaged green shoots

The net profit of all Chinese commercial banks totaled 1.939 trillion yuan in 2020, down 2.7% from 1.993 trillion yuan in 2019, according to the CBIRC. The green shoots of the recovery began to emerge in the second half of 2020, after the industry’s total net profit in the six-month period ended June 2020 fell 9.4% to 1,027 trillion yuan from 1,133 trillion. yuan a year earlier.

A note from Nomura on Feb. 10 also predicted a “strong rebound in earnings” and that Chinese banks, especially major government lenders, would likely maintain their dividend policy. The dividend payout ratios of major Chinese banks have hovered around 30% in recent years.

Individual Chinese banks are expected to release their annual results for 2020 around the end of March.

Key improvement indicators

Despite a wave of high-profile bond defaults by state-linked companies in China in the fourth quarter of 2020, the overall banking sector NPL ratio fell to 1.84%, the lowest since 1.81 % in the second quarter of 2019, according to the CBIRC. It was also down from 1.96% in the previous quarter, which was the highest level in at least six years.

The ratio of special mention loans, which are deemed at risk of becoming nonperforming, also declined to 2.57% from 2.66%. The decline in these ratios could be linked to the consolidation of non-performing loans in 2020, as banks ceded 3 trillion yuan of bad loans during the year, writing off up to 1.2 trillion yuan from their balance sheets, February 1. The rating from S&P Global Ratings said.

A February 8 memo from CGS-CIMB Securities said the assignment of bad debt “is oddly short of the original target of 3.4 trillion yuan” announced in August 2020.

“We believe this is because the rate of bad debt formation has been much better than policymakers expected,” the note said. “This is due to the strong rebound in industrial profitability and monthly statistics which indicate an improvement in the quality of consumer credit.”

The capital positions of banks have also improved, giving them more buffer and firepower to grow their loan portfolios as well as other businesses. The overall liquidity coverage ratio of Chinese commercial banks stood at 146.7% in the December quarter, down from 138.67% three months earlier.

Loan growth could slow down further

Credit growth in Chinese banks could slow further in 2021 as the government cuts support for the economy, China Renaissance’s Pang said.

Total yuan loans outstanding from Chinese financial institutions hit a new record 172.75 billion yuan as of December 31, 2020, up 12.82% from 153.11 billion yuan a year ago , according to data from the People’s Bank of China. However, on a monthly basis, loan growth in December 2020 fell for the seventh consecutive month, which was still up 12.82% year on year.

“We believe that credit growth in general will continue to decline further in 2021, as the [People’s Bank of China] reduce support to the economy but focus more on containing financial risks and capping leverage, ”Pang said.

In the fourth quarter of 2020, the outstanding amount of so-called inclusive loans targeting small businesses and individuals rose to 15.267.6 trillion yuan from 14.762 billion yuan in the previous quarter. While all types of banks increased their lending to this segment, rural financial institutions remained the main contributor, with a loan balance totaling 5.178 trillion yuan, compared to 5.065 trillion yuan in the previous quarter.

“We believe investors will be watching closely whether the continued deceleration in credit growth could derail China’s macroeconomic recovery and risk more defaults,” he said. “In addition, concerns about the credit crunch and the drain on funds can cause concerns in the market if there are small measures to calm inflation, limit asset bubbles or curb speculation.”

As of February 17, US $ 1 is equivalent to 6.46 Chinese yuan.