China’s five biggest banks have reported their biggest profit declines in at least a decade as they brace for further increases in bad loans in an economy weakened by the crisis. coronavirus pandemic.

The five lenders – Industrial and Commercial Bank of China, Construction Bank of China, Agricultural Bank of China, bank of china and Communication bank – published their latest financial report sheets last week.

All five saw their profits decline by at least 10% year-on-year for the first half of 2020, as they set aside more funds for potential loan losses over the next few months, much like de many banks around the world.

“Banks were invited to … perform “national service”. They’ve been asked to support the economy at the expense of their own task force, ”Jason Tan, research analyst at CreditSights, told CNBC. “Squawk Box Asia” Monday.

Chinese banks, among the world’s largest in terms of assets, have been placed at the forefront of the government’s efforts to mitigate the economic blow to households and businesses. Authorities in Beijing would have asked financial institutions to sacrifice 1.5 trillion yuan ($ 219 billion) in profits this year to help businesses by lowering lending rates and deferring loan repayments.

China’s economy – the second in the world – is expected to grow only 1% this year, as measures to contain the coronavirus hit global economic activity, according to the International Monetary Fund. It would be China’s weakest growth in at least 40 years, according to fund data.

Most of the pressure on asset quality may not yet have been felt due to the still-in-place moratorium on loan repayments as well as interest payments.

Jason tan

research analyst, CreditSights

China, the first country affected by the rapidly spreading coronavirus, showed signs of economic recovery. But the effect of the economic downturn on banks has not fully materialized, Tan said.

“Most of the pressure on asset quality may not have passed yet because of the still-in-place moratorium on loan repayments as well as interest payments,” he said.

“So these will probably come in the second half of the year, if not the first half of 2021 when the moratorium is lifted in March 2021,” he added.

Mid-sized banks perform better

Morgan Stanley’s analysis of the latest Chinese bank earnings reports found that midsize lenders outperform their larger peers in terms of operating profits before factoring in provisions made for futures. irrecoverable debts.

In a Sunday note, analysts at Morgan Stanley pointed out that pre-provisioned operating profits of most Chinese midsize banks rose 8 to 27 percent in the second quarter from a year ago. This is better than that of the seven largest banks, which fluctuated between a 2% drop and a 6% growth, they added.

Still, Jefferies analysts said in a note that Chinese banks are “very likely” to cut dividends this year after setting aside more provisions. But with bank profits likely to recover after hitting a low in the second half of this year, dividends could return in 2021, they said.

Chinese bank stocks suffered in 2020. The FTSE China A 600 Banks Index – which tracks large and mid-cap banks listed on Mainland China stock exchanges – has fallen around 8.9% so far this year. year, according to data from Refinitiv.

In contrast, the broader FTSE China A 600 index climbed 17.9% over the same period, according to data from Refinitiv.

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