China’s largest banks resilient to negative shocks in 2022: Natixis

Government stimulus is expected to support loan growth throughout the year.

China’s largest banks are expected to remain resilient from most negative shocks throughout 2022, with loans expected to grow thanks to government stimulus, according to Natixis Asia Research.

Chinese banks notedly made significant progress in profit growth in 2021 as the need for loan provisioning and write-offs was lower than 2020. 

“Although credit growth has not been very strong lately and banks' interest margins keep shrinking, the fiscal and monetary stimuli announced during the Two Sessions in early March should support loan growth,” Natixis wrote in a media note.

And whilst banks still face challenges in net interest margin and higher costs, the expected loan growth stemming from the stimulus should help to buffer such negative trends, according to Natixis. 

“Furthermore, better asset quality, less exposure to the real estate sector, and adequate capital mean large banks are more shielded from better financial health,” it added.

Chinese banks saw a return to profit growth in 2021, registering a whopping 12.6% expansion compared to the 2.7% decrease in 2020. The rebound was not purely cyclical as total profits are now 10% higher than the pre-pandemic level. 

Return on asset (ROA) also increased slightly from 0.77% in 2020 to 0.79% in 2021, ending the nine consecutive years of decline. 

However, the loan prime rate (LPR) reform has exerted pressure on the net interest margin (NIM), leading to a further reduction from 2.1% in 2020 to 2.08% in 2021. The cost-to-income ratio also worsened, from 31.2% in 2020 to 32.1% in 2021. 

The divergence between large and small banks is likely to stay with the fundamental differences in business models, especially regarding asset quality and solvency. Large banks perform better with NPL and stressed loan ratios of 1.37% and 3.21% in 2021, lower than 2.07% and 4.85% for small banks. Large banks also have a much higher capital adequacy ratio of 17.3%, higher than 13.4% for small banks. For the risks related to real estate developers, the loan portfolio for large banks is also safer with a smaller loan book for developers.