Chinese banks brace for cost of national service to boost economy

China has been galvanising its companies to perform national service to help shore up the pandemicravaged economy from a historic slump. The cost to the nation's biggest lenders may be the largest profit pullback since the global financial crisis.

The banking regulator has tried to manage the impending shock by disclosing the big-picture decline of less than 10 per cent industry-wide, and 12 per cent on average for the nation's six biggest lenders. Reports published by HSBC and Standard Chartered, for example, suggest more pain is in store.

The first-half earnings reports, starting from August 28, will showcase the extent of damage to each Chinese banking group as bad loans reached the highest in a decade. State-mandated forbearance measures to help small businesses weather the crisis, could have also undermined their profitability.

"I wouldn't be surprised if some of the banks' net profit declined by as much as 20 per cent in the second quarter" versus a 4-5 per cent growth rate in the first, said Terry Sun, a banking analyst at CMB International Securities. "We believe Chinese banks could be kitchen-sinking amid Covid19 shock" or front-loading the bad news at the earliest chance, he added.

Chinese banks' net profits fell 24 per cent during the second quarter compared with a year earlier, the commission said earlier this month. Cindy Wang, an analyst at DBS Bank based in Hong Kong said banks would typically choose to delay loan loss provisions until the fourth quarter. But the pandemic has changed the balance of things.

"The lower-than-expected profitability was primarily caused by banks' taking a more conservative approach towards recognising and making provision for loan losses in the second quarter, as Covid-19 has caused more borrowers to fall behind their loans," she added.

The central government in June called on banks to sacrifice as much as 1.5 trillion yuan (US$212 billion) in profits this year to finance cheap loans, trim fees, defer loan repayments and grant more unsecured credit lines to help businesses survive the downturn.