Oct 30, 2021 04:31 AM

China’s Mega Banks Extend Profit Gains on Easing Bad Loans

Chinese banks had more than 51.4 trillion yuan ($8 trillion) of outstanding loans to the real estate sector as of September
Chinese banks had more than 51.4 trillion yuan ($8 trillion) of outstanding loans to the real estate sector as of September

(Bloomberg) — China’s biggest state-run banks extended their earnings recovery in the third quarter, fueled by rising credit demand and improving asset quality even as turmoil mounts in the nation’s sprawling real estate market.

Industrial & Commercial Bank of China Ltd., the world’s biggest bank by assets, reported Friday that net income rose by 11% in the third quarter, according to a filing. Bank of China Ltd., Agricultural Bank of China Ltd. and China Construction Bank Corp. delivered gains of 13% to 16%. All lenders recorded a decline in nonperforming loan ratios from the end of last year.

After being enlisted to help millions of struggling businesses with cheap loans during the pandemic, the closely managed $52 trillion banking industry staged a comeback along with the economy this year. But it now faces renewed risks as the nation’s housing market is teetering amid a Beijing clampdown on easy credit, which along with electricity shortages dragged down economic growth in the latest quarter.

“We maintain our forecast for a marked slowdown in China’s property sector and overall economy and a further increase in credit defaults and nonperforming loans,” Nomura Holdings Inc. economists led by Lu Ting wrote in an Oct. 25 note. “To counteract the strong growth headwinds, we expect Beijing to step up monetary and fiscal easing, but it is unlikely to ease its unprecedented tightening measures on the property sector and industries with high carbon emissions and high energy intensity.”

China’s real estate market has been rocked by a debt crisis at China Evergrande Group after a multi-year campaign by officials in Beijing to reduce leverage and prevent a bubble. The sector is now driving a record surge of defaults in China’s bond market.

Chinese banks had more than 51.4 trillion yuan ($8 trillion) of outstanding loans to the real estate sector as of September, an increase of 7.6% from a year earlier. The exposure was more than that of any other industry and accounted for about 27% of the nation’s total lending, according to official data.

Overall, about 41% of China’s banking system assets were either directly or indirectly associated with the property sector by the end of last year, and any slide in property prices may lead to knock-on effects on asset quality due to higher default rates in related sectors and lower collateral value, according to Citigroup Inc.

The stress for real estate companies adds to a string of broader risks for China’s economy, which depends on the housing market for about 30% of gross domestic product. Home prices fell in September for the first time in six years, while real estate investment slid for the first time since last year.

Even so, regulators have vowed to keep the curbs on the property market, dismissing concerns that the crisis enveloping Evergrande will have any major impact on the credit profile of the sector. While officials have told banks to speed up mortgage lending again, the central bank has indicated that contagion risks from Evergrande are “controllable” and exposure at individual financial institutions is limited.

China’s central bank has pushed almost 1 trillion yuan into the banking system over the past two weeks to cope with month-end needs such as corporate tax payments and local debt issuances.

Meanwhile, China is stepping up efforts to strengthen its financial system by imposing tougher capital requirements on 19 banks designated by the central bank this month as “systemically important.” ICBC, Construction Bank, Agricultural Bank and Bank of China are facing a capital surcharge of 1% on top of the minimum core tier-1 ratio, a requirement less onerous than in other banking systems including in Singapore.

“This reflects the authorities’ gradual approach to strengthening financial stability because of the potential negative effects a more stringent capital regime might have on growth,” Moody’s Investors Service analyst Nicholas Zhu wrote in a note.

Contact editor Bob Simison (

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