Chinese banks to give up $211b in profits, face asset yield decline

They are likely to surrender up to $197b in income.

China’s order on banks to sacrifice $211b (CNY1.5t) in profits will translate to a 40-60bps decline in asset yield for this year, with a higher chance of rate cuts in Q3 and profit downturn YoY in H2, according to a Jefferies report.

Analysts believe that the $211b profit reduction will likely result in a 68bp reduction in average loan yield, on top of a 100bp cut in average corporate/local government special bond yield. In addition, there will be more unsecured loans to SMEs, analysts noted.

Banks are likely to give up about $183b (CNY1.3t) to $197b (CNY1.4t) in income given that they account for 85-91% of total RMB loans and assets. The deferment of SME loan payments, which may push banks into giving up another $14b (CNY100b), will not affect their reporting this year as they will still recognise interest income and will not classify these loans as overdue or non-performing.

Fee income sacrifice will likely cost banks $42.4b (CNY$300b) as fees are primarily brought about by wealth management and credit cards, whilst $169b (CNY1.2t) to $183b (CNY1.3t) will come from interest income, indicating a 60-80bp decline in yield of around $24t (CNY170t) in real economy financing, analysts said.

The State Council statement will serve as guidance for banks’ pricing which will see a higher chance of over 50bp one year loan prime rate cuts. Although banks see higher pressure in 2021 due to more cuts and deferring loans, it will be reasonable for them to allocate enough provisions in advance and report profit decline amidst the downturn, the report concluded.