Profits drop for China's big state-owned banks, property lending leaps
A round-up of key economic and financial developments in China as of Tuesday, 4 June, 2024
China's big six state-owned banks have seen their profits slide considerably, while a leap in credit extension to the real estate sector could put further pressure on net interest margins and earnings.
Lending to small private businesses is also on the rise, and the non-performing loans of banks are at least holding steady. Smaller regional banks are tapping the bond market for capital injections, while Shanghai, Shenzhen and Guangzhou have joined the ranks of cities to loosen property lending conditions.
Big banks see profit growth go into reverse as net interest margins narrow
An ongoing contraction in the net interest margins of Chinese banks is undermining the profitability of the big state-owned lenders.
In the first quarter of 2024 Chinese banks achieved net profits of 672.3 billion yuan, for meagre growth of 0.66% in YoY terms, according to figures released by the National Administration of Financial Regulation (NAFR) on 31 May.
The big six state-owned banks saw profits go into reverse with a fall of -4.57%. By contrast, foreign-invested banks saw net profits leap 31.34%, while rural commercial banks, privately operated banks and municipal commercial banks posted profit growth of 15.50%, 6.25% and 4.04% respectively.
Domestic analysts impute the drop in profitability for big state-owned banks to narrowing net interest margins, after lending rates declined yet deposit rates remained elevated.
NAFR's data indicates that the net interest margin of Chinese commercial banks was 1.54% for the first quarter, marking a decline of 0.15 percentage points compared to the reading of 1.69% for 2023.
The net interest margins of China's big six banks were 1.48% for ICBC, 1.44% for Agricultural Bank of China, 1.57% for China Construction Bank, 1.44% for Bank of China, 1.92% for Postal Savings Bank of China and 1.27% for Bank of Communications.
Property loans leap 147%, could put further pressure on bank profits
Efforts by Beijing to boost lending to the property sector have proved highly fruitful, but concerns have arisen over their impact on bank profitability.
As of the end of the first quarter, outstanding real estate development loans had leapt by 147% compared to the same period last year, according to figures from NAFR.
Data from the central bank further indicates that net growth in real estate development lending stood at 880 billion yuan in the first quarter, as compared to a figure of 190 billion yuan for the same period last year.
According to a report from Securities Journal, the abrupt surge has reversed an ongoing decline in real estate development loans as a share of total bank lending over recent years.
While real estate development loans stood at 7.33% of lending as of the end of 2019, this figure fell to 5.42% by the end of 2023. The reading has since risen in the first quarter to hit 5.7%.
The recovery in real estate lending arrives after the unveiling of a slew of key policies to boost the property market, including the launch of the real estate financing coordination mechanism (地产融资协调机制) in January, which has since led to the approval of over 900 billion yuan in credit.
Last month the Chinese central bank's "17 May Policies" outlined an unprecedented loosening of property loan conditions, including the removal of the floor on interest rates for mortgages.
These measures have triggered concerns over the impacts on the net interest margins and profit levels of banks, as well as deposit rates for savers.
"At present, banks are definitely facing a hard choice between wanting to expand [credit] volumes while finding it difficult to reduce interest rates," said Li Yujia (李宇嘉), chief researcher at the Guangdong Province Urban Planning Residential Policy Research Centre (广东省城规院住房政策研究中心).
"Against a background of a drought in assets, many banks are competing for home loans as form of high-quality asset, while households are mainly focusing on which bank offers the lowest loan rates.
"Banks have no choice but to reduce interest rates to grab customers. In actuality, this is a double-edged sword. Reducing interest rates puts further pressure on bank profits, and at the same time if non-performing mortgages rise, there is the possibility of an expansion in losses."
Lending to small businesses leaps, quality of banking assets hold steady
As of the end of the first quarter, the non-performing loan (NPL) balance of commercial banks in China stood at 3.4 trillion yuan, for an increase of 141.4 billion yuan over the quarter, according to figures released by NAFR on 31 May.
The NPL ratio of commercial banks was 1.59%, holding steady with the reading for the previous quarter, in a sign that the quality of loan assets is holding up despite the faltering property sector and uncertainty over growth.
The balance of loans by Chinese banks to micro-and-small enterprises stood at 74.5 trillion yuan as of the end of the quarter. This included 31.4 trillion yuan in financial inclusion loans to micro-and-small enterprises, for a year-on-year rise of 21.1%.
Smaller regional banks continue to boost capital with bond issues
Smaller banks around China continue to tap the debt market to improve their capital standing.
On 29 May, Guangzhou Rural Commercial Bank (广州农商行) filed a statement with the Hong Kong Stock Exchange announcing that it would issue 12 billion yuan via an issue of perpetual bonds.
The bonds will have a coupon rate of 2.78% for the first five years, after which the rate will be adjusted once every five years. The issuer will have the right to conditional redemption on every dividend payment date after the fifth year.
The issue is GRCB's first fund-raising via the use of perpetual bonds, and is expected to raise its tier-1 capital adequacy ratio by over 1.5 percentage points.
As of the end of 2023, GRCB's capital adequacy ratio was 13.68%, for an increase of 1.08 percentage points compared to the end of the previous year. The tier-1 capital adequacy ratio stood at 11.12%, for a rise of 0.56 percentage points.
NAFR data indicates that as of the end of the first quarter, the capital adequacy ratio of Chinese commercial banks was 15.43%, while the tier-1 capital adequacy ratio was 12.35%, and the core tier-1 capital adequacy ratio was 1.59%.
On 29 May, NAFR announced that it had given its approval for Bank of Chengdu to raise 15 billion yuan to improve its capital standing.
Prior to this, NAFR had given its approval for 12 banks to raise up to 581.5 billion yuan via various capital instruments since the start of the year.
Shanghai and Shenzhen join list of 25 cities to loosen mortgage conditions
Shanghai, Guangzhou and Shenzhen all recently announced adjustments to real estate lending policies, following the lead of other local governments that have loosened credit conditions for the property market.
As of the end of May, at least 25 provincial or municipal governments had reduced the down payment ratios for first and second-home loans. With the exception of Shanghai and Shenzhen, all of these local governments had brought the down payments to 15% for first homes and 25% for second homes.
On 17 May, the Chinese central bank unveiled what analysts have referred to as an unprecedented loosening of lending policies for the housing sector, including the removal of floors for mortgage rates and reductions to down payments.
Communist Party's theoretical journal calls for driving growth of 5G, smart networked cars, commercial space travel
On 1 June, the Communist Party's theoretical journal Qiushi published an article drafted by the Ministry of Industry and Information Technology (MIIT) entitled "Accelerating the Development of New Quality Productive Forces, and Deeply Driving New Models of Industrialisation" (加快发展新质生产力 深入推进新型工业化).
The article called for:
Building a modernised industrial system with advanced manufacturing as its backbone.
Actively guiding and adapting to the new revolution in science and technology.
Driving the healthy and orderly development of emerging industries including 5G, smart networked cars, new energy, new materials, commercial space travel and the low-altitude economy.
Industrial PMI falls 0.9 percentage points to under 50%
The latest purchasing managers' index (PMI) reading from China's National Bureau of Statistics came in at 49.5% for May, marking a decline of 0.9 percentage points compared to the preceding month. A reading of less than 50% signifies a negative outlook.
Large-scale enterprises posted a PMI 0f 50.7%, for a rise of 0.4 percentage points. Medium and small-scale enterprises reported PMIs of 49.4% and 46.7% respectively, for declines of 1.3 and 3.6 percentage points.
China enters the era of mandatory ESG disclosures for listed corporations
21Jingji says 2024 is the year of ESG for the Chinese financial system.
Last month the Ministry of Finance (MOF) issued the draft version of the "Basic Criteria for Sustainable Disclosures by Enterprises" (企业可持续披露准则——基本准则（征求意见稿）), for the solicitation of opinions from the public.
MOF called for the establishment of a sustainability criteria system by 2030.
With the guidance of the China Securities Regulatory Commission (CSRC), all three of China's stock exchanges in Shenzhen, Shanghai and Beijing have also officially issued the "Listed Company Sustainability Supervision Guide - Sustainable Development Reports" (上市公司持续监管指引——可持续发展报告).
PBOC and NAFR have recently issued directives to incorporate ESG into credit assessments, and ordered financial institutions to improve their ESG chops.