Charts of the Day: Surging Bad Loans Dampen Chinese Banks’ Profits
The banking sector is expected to dispose of 3.4 trillion yuan ($489.5 billion) of soured loans in 2020, a 50% surge from last year, a senior regulator said (link in Chinese) recently, as banks have been asked to sacrifice profits to soften Covid-19’s economic impact.
The rising bad debt and a series of government policies to support economic recovery saw commercial bank profits tumble 24% year-on-year in the second quarter this year, according to Caixin’s calculations based on official data (link in Chinese).
As borrowers have struggled to service their debts, commercial banks’ nonperforming loan (NPL) ratio rose to an 11-year high of 1.94% at the end of the second quarter, showed Monday data from the China Banking and Insurance Regulatory Commission (CBIRC). This was the highest level since the end of the first quarter of 2009, when the ratio hit 2.04% as the country was mired in the global financial crisis.
In recent months, China has rolled out a raft of measures to weather the impact of the Covid-19 pandemic on businesses, including urging banks to lend more and extend loan repayments.
In the first half of this year, the deadlines for more than 1.8 trillion yuan of principal and interest on loans for micro, small and midsize enterprises were extended, the CBIRC said (link in Chinese). In May, the central government announced that loan repayment deadlines can be further extended to the end of March 2021 for micro, small and midsize businesses hit hard by the pandemic.
This was followed by a warning last month from the CBIRC that banks should be prepared for a potential “major rebound” in NPLs because the impact of Covid-19 has yet to be fully felt.
In the second half of the year, more bad corporate loans may be exposed, as foreign trade could suffer more if the coronavirus pandemic has not been controlled worldwide by the third quarter, analysts at Guosen Securities Co. Ltd. estimated in a June note (link in Chinese).
In June, the Chinese government called on banks and other financial institutions to sacrifice 1.5 trillion yuan in profits this year to support virus-hit companies, including offering lower lending rates and cutting fees.
In the first five months, the average annual interest rate of loans provided to small and micro enterprises with total credit lines under 10 million yuan was 6.03%, down 0.67 percentage points from the level for the whole of 2019, according to (link in Chinese) the CBIRC.
Smaller commercial banks are much more vulnerable to external risks amid the pandemic than their larger peers, multiple economists said.
China has also introduced measures to help small and midsized lenders, including allowing local governments to sell bonds to recapitalize troubled banks, and channeling funds to regional banks to encourage them to offer more credit to small businesses.
Guo Yingzhe contributed to this report.
Contact editor Joshua Dummer (firstname.lastname@example.org)
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