State lenders set for profit growth in first quarter

State-owned banks are set to deliver year-on-year earnings growth of 5 per cent to 10 per cent when they report first-quarter results tomorrow, helped by a record level of loans and supportive measures from the central bank that minimised the impact of the slowing economy.

The banks set to report earnings include Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Bank of Communications, Agricultural Bank of China and Postal Savings Bank of China.

Banks’ lending in the first quarter rose by 8.7 per cent to a record 8.34 trillion yuan (HK$9.98 trillion) from the previous record of 7.67 trillion yuan a year earlier.

That, along with improved interbank liquidity conditions during the first three months, meant banks were able to keep their net interest margin – a key gauge of profitability – largely stable, analysts said.

“Most banks have heeded the government’s call for achieving stable economic growth this year and they have dialled up their lending to businesses during the first quarter,” DBS analyst Lu Minyi said.

“We expect leading stateowned banks to report profit growth of below 10 per cent.”

The People’s Bank of China (PBOC) cut the reserve requirement ratio, or deposits that banks must park at the central bank, by 50 basis points in December, reducing the cost of funding for banks by 15 billion yuan per year. The central bank made another quarter-percentage-point cut earlier this month.

For the first quarter, the banks are also likely to report their non-performing loan (NPL) ratios remained stable compared with the end of last year, minimising their burden from charges for impaired loans.

However, going into the second and third quarters, the amount of delinquent loans was likely to pick up again, said Chen Shujin, an analyst at Jefferies.

“The liquidity issue miring the property sector since last year will become more obvious this year among banks and show up as a higher NPL ratio,” Chen said.

“This is likely to come with an overall pickup in corporate and retail NPLs due to the slowing economy.”

Many banks are creditors to troubled developers such as China Evergrande Group and Fantasia Holdings, which have missed bond repayments. They are exposed both through direct loans to the developers and mortgages tied to homes they build.

The NPL ratio for the banking sector stood at 1.79 per cent during the quarter, down 0.03 percentage point from the beginning of this year, according to the industry regulator.

Historically, whenever China’s economic growth declined by 2 percentage points, banks’ NPL ratios would rise, Chen said.

For the full year, Beijing has targeted gross domestic product growth of around 5.5 per cent. That forecast predated the Omicron wave that struck Shanghai.

BNP this month revised down its 2022 GDP forecast to 4.5 per cent from 4.9 per cent, reflecting the impact from the country’s strict zero-Covid strategy as it battles to contain the outbreaks.

The French bank said the current wave had had a deeper impact on China’s economy than the previous rounds, citing widespread disruptions in production, logistics and transport.

“Economic growth is likely to be negative in April and low in May, with a recovery not seen until June,” its economists, including Chen Xindong and Jacqueline Rong, wrote in a report.