Chinese bank profits spared from real estate distress as Evergrande and struggling peers threaten loan quality

Chinese banks reported a strong set of third quarter operating results, avoiding distress among real estate developers on the continent as the industry went through tough times. More tests await in the coming months as debt tightening persists, putting loan quality at risk, analysts said.

The Bank of Communications and the Postal Savings Bank of China posted more than 20% profit increase, beating analyst estimates. Almost all of them showed lower sequential bad debt ratios, based on this week’s newsletters.

Other challenges await him as China growth engines are running out of steam while the real estate and manufacturing sectors are deteriorating. Chinese bank stock tracking indicators in Hong Kong, Shenzhen and Shanghai have lost 14-16% since mid-February amid a crackdown on excessive developer debt, Bloomberg data shows.

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Financial distress in China Evergrande darkens the outlook for the industry as the economy quickly loses its recovery momentum. Photo: AP alt = Financial distress in China Evergrande darkens the outlook for the industry as the economy quickly loses its recovery momentum. Photo: AP

China Evergrande, struggling with more than 1.97 trillion yuan ($ 305 billion) in liabilities, has struggled to repay lenders and creditors. The likes of Fantasia Holdings, Modern earth and Oceanwide Holdings have defaulted on their offshore bond obligations, and rating firms see the credit crunch extend until 2022.

“If some of these developers still do not repay their banks in the fourth quarter, the banks should account for them as non-performing loans (NPL),” said Cindy Wang, analyst at DBS.

Banks are exposed to the real estate sector through loans to developers and mortgages to homebuyers on projects involving struggling developers. Loans to real estate developers made up about 8% of bank loans, analysts said.

“Currently, there are still many uncertain factors in the process of global economic recovery and the pandemic situation,” Bank of Communications said in its earnings release Friday. “The basis for national economic recovery must be strengthened [supported]. “

Optimism about the Chinese economy has faded as the recovery has lost momentum over the past three quarters, fueling speculation that policymakers will turn on the stimulus tap. Soaring commodity prices and power cuts contributed to a sharper-than-expected contraction in the manufacturing sector this month, the government said on Sunday.

Without any retreat from policy tightening measures in the industry, Chinese developers could find it difficult to refinance their debt, according to Jefferies. The result would be higher NPLs in 2022, its analyst Chen Sujin said.

Manufacturing in China contracts for second month due to high material prices and weak demand

Moderate growth, tighter credit supply and tighter regulatory standards remain hurdles for the Chinese stock market, Schroders strategists said in a report released earlier this month. Investors should wait for more signs of credit easing before taking on more risk, they added.

Below is a summary of key third quarter banking results from earlier this week.

Bank of Communications recorded a 38 percent increase in net profit to 22.3 billion yuan from a year earlier, the largest gain among the six largest state-controlled banking groups. Its NPL ratio was 1.6 percent versus 1.87 percent for the industry.

Industrial and Commercial Bank of China net profit rose 10.6 percent to 88.3 billion yuan from the previous year. Its NPL ratio fell to 1.52% from 1.54% at the end of June.

China Construction Bank’s profit rose 15.6 percent to 78.9 billion yuan from a year earlier. Its NPL ratio fell to 1.51% from 1.53% on June 30.

Bank of China profits rose 13.2% to 50.7 billion yuan, with a bad debt ratio of just under 1.29% from 1.3% on June 30.

Agricultural Bank of China net profit rose 14 percent to 64.4 billion yuan. The lender reduced its bad debts to 1.48% of total loans, from 1.5% on June 30.

The Postal Savings Bank’s net profit rose 22.5% to 23.5 billion yuan, from 19.2 billion yuan, while its NPL ratio was unchanged at 0.82%.

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