More profit woes for Chinese banks as regulators plan NPL hike

$160.9m of targeted full-year NPL resolution were completed in H1.

Chinese banks will continue to see falling profits in H2 as authorities plan to more than double the amount of resolved non-performing loans (NPL) versus H1, a Fitch Ratings report revealed.

Banks reported a 9.4% drop in aggregate net profit to $146b (CNY1t), with all Fitch-rated lenders posting net profit declines due to higher expected credit losses and lower net interest margins. Q2 aggregate net profit also sharply dropped QoQ even if the country’s real GDP inched up 3.2% in the same period.

Out of the $497m (CNY3.4t) targeted full-year NPL resolution by the China Banking and Insurance Regulatory Commission (CBIRC), $160.9m (CNY1.1t) was completed in the first half-year, versus $336.6m (CNY2.3t) resolved last year.

Whilst active NPL resolution has allowed lenders to keep their reported allowance coverage ratios notwithstanding the impact of the pandemic, it came at the expense of weaker reported profitability as banks saw varying levels of increases in provisioning, Fitch said, consistent with China’s official purchasing manager’s index (PMI) at 51.0 for August.

“That said, the banks have guided for higher NPLs for the rest of the year as uncertainties remain amid the global pandemic and ongoing US-China tensions,” the report explained.

Core capital ratios generally fell during H1 as banks continued to grow their risk-weighted-assets. Loans were up 8%, meeting expectations for full-year growth of 14% as loans typically increase faster in the first half.

Despite pressure on profitability, Chinese banks will still aim to pay dividends for 2020, which could limit their pace of growth, Fitch said.