China is leaning on its massive banks like never before to help bolster an economy facing its worst slump in four decades.
The government will push the financial industry to sacrifice 1.5 trillion yuan ($211 billion) in profit this year by offering lower lending rates, cutting fees, deferring loan repayments, and granting more unsecured loans to small businesses, the State Council said in a statement late Wednesday after a meeting led by Premier Li Keqiang. Regulators are also asking banks to keep profit growth below 10% this year, people familiar with the matter said earlier.
The rare moves underscore concerns about how quickly China can recover from the coronavirus outbreak. While Chinese banks were already expecting weaker performances this year, the direct requirements on limiting their profits still come as a surprise and may further damp investors’ interest in the sector during difficult economic conditions.
Chinese banks’ gross revenue and earnings growth may drop to zero in 2020 from 5% in the first quarter, according to Citigroup Inc. Listed banks may be better off compared with some regional lenders, which are likely to see negative earnings growth, analysts led by Judy Zhang said in a note on Wednesday.
China’s $41 trillion banking system is at the forefront of propping up companies hurt by the outbreak of coronavirus and the impact from its global spread. In a severe downside case, assuming economic growth at 4.8% annually until 2021, the industry could face an unprecedented 39% slump in profits this year, according to UBS Group AG. Without government forbearance measures, their earnings may tumble by 70% to absorb the wave of bad debt.
Official data show bad debt has so far only ticked up marginally even as a lockdown earlier this year hit hard at many borrowers.
Lenders led by Industrial & Commercial Bank of China Ltd. more than doubled loans to businesses in the first quarter, while deferring and rolling over 1.5 trillion yuan in repayments. That allowed the banks to report only a 0.06 percentage point increase in non-performing loan ratios to 2.04% at the end of March, while posting a 5% increase in combined earnings to 600 billion yuan.
Still, a few listed lenders including China Merchants Bank Co. and Bank of Ningbo Co. managed to deliver growth that topped 10%.
Merchants Bank dropped more than 2.5% in Shanghai and Hong Kong as of 10:17 a.m. local time. The CSI 300 Financial Index fell as much as 0.7%, extending year-to-date loss to more than 14%, making it the second-worst performer after the energy sector.
S&P Global estimated that the non-performing asset ratio, a more stringent measure of troubled advances that includes forborne loans, could almost double to 10% from pre-outbreak levels this year. That’s a projected increase of 8 trillion yuan.
The government in May decided to extend loan relief measures for the nation’s smaller businesses by nine months to March next year, giving further reprieve to trillions of yuan of troubled loans.