China's mega banks post worst profit slump on bad debt wave

China's biggest banks suffered their worst profit decline in more than a decade as a cascade of loans to businesses across China are going bad.

Reporting their first- half earnings on Sunday, Industrial & Commercial Bank of China Ltd., the world's largest lender by assets, China Construction Bank Corp., the second- largest, Agricultural Bank of China Ltd. and Bank of China Ltd. all posted drops in profit of at least 10%. Loan loss provisions jumped between 27% and 97% at the four banks.

China's $ 45 trillion banking system has been put on the front- line of helping alleviate the worst economic slump in 40 years, triggered by a large scale shutdown due to the virus outbreak. Authorities have required lenders to forgo 1.5 trillion yuan ($ 218 billion) in profit by providing cheap funding, deferring payments and increasing lending to small businesses struggling with the pandemic.

In total, the nation's more than 1,000 commercial banks posted a 24% decline in second quarter profits, with non- performing loans hitting a record 2.7 trillion yuan. Citigroup Inc. last month slashed 2020 to 2022 earnings forecasts for major Chinese banks by more than 10 percentage points and expects them to suffer a 13% drop in profit this year.

"Under mounting political pressure, China banks not only have had to further cut loan yields to subsidize the real economy, but also need to accelerate counter- cyclical provisioning and adopt more conservative NPL assumptions in setting provisions," Citigroup analysts led by Judy Zhang wrote. "The potential negative earnings growth will overhang the China banks' near- term share performance."

Investors have never been so downbeat on Chinese lenders' outlook. Shares of the biggest banks are trading at about 0.45 times their forecast book value, a record low valuation, after underperforming the benchmark indexes in Hong Kong and on the mainland for most of the past five years.

Moody's Investors Service expects bad loan pressure to stay high amid weak consumer sentiment, putting banks' profitability under stress for the rest of 2020. Economists forecast gross domestic product will grow 2% this year, slowing from 6.1% in 2019.

Chinese banks joined the chorus of global lenders warning about a difficult economic outlook. HSBC Holdings Plc said the fallout from the pandemic may trigger loan losses of as much as $ 13 billion this year, while JPMorgan Chase & Co. spoke of a protracted downturn and said government stimulus was making it harder to gage the economic damage.

In the worst case, China banks could be guided to reduce profit by around 20% to 25% in 2020, according to Jefferies analyst Shujin Chen. Further reduction would hurt banks' capital even without any dividend payout and would be harmful to financial stability, she said.

"The banking industry is facing a more complex and uncertain external environment," CCB said in its report, citing the pandemic, economic "downward pressure" in China, "geopolitical tensions" and the potential for a disruption in globalization.

China is recovering slowly as President Xi Jinping is accelerating his push to make the economy more independent amid a broadening confrontation with the U. S. over everything from trade to finance and technology.

Tensions between the world's two super powers over Hong Kong has sparked tit- for- tat sanctions on politicians and officials on both sides over the past few weeks. China's biggest lenders are looking over their accounts in order not to endanger their access to crucial dollar funding. The big four banks had $ 1.2 trillion in such funding at the end of June and could face fines for doing business with any of the 11 Hong Kong and mainland officials targeted by U. S. sanctions.