China's Top 4 Banks Post Worst First-Half Profits in 10 Years...Concerns Over SME Loan Defaults

Most Banks' Earnings Decline, Including Industrial Bank's Net Profit of 148.8 Billion Yuan
Provision for Bad Debts Increases Significantly

[Image source=EPA Yonhap News]

[Asia Economy Beijing=Special Correspondent Jo Young-shin] The profits of China's four major banks?Bank of China, China Construction Bank, Industrial and Commercial Bank of China, and Agricultural Bank of China?recorded their worst performance in a decade in the first half of this year. This was due to the worsening of non-performing loans in these banks and a significant increase in loan loss provisions to prevent the contagion from spreading to the banking sector.

According to Bloomberg on the 30th (local time), these banks expanded loans to small and medium-sized enterprises (SMEs) during this period and provided financial support such as principal and interest repayment deferrals and loan interest reductions, resulting in profits decreasing by at least 10%. In particular, as support for SMEs was strengthened, non-performing loans also increased, causing loan loss provisions to surge by up to 97% compared to the previous year.

By bank, the Industrial and Commercial Bank of China posted profits of 148.8 billion yuan, down 2 billion yuan from the same period last year, while China Construction Bank earned 137.6 billion yuan in profits, a decrease of 6.6 billion yuan year-on-year. The net profits of Agricultural Bank of China and Bank of China were 108.8 billion yuan and 100.9 billion yuan, respectively.

This is the result of the Chinese government directing large banks to support SMEs as they faced financial difficulties due to the COVID-19 pandemic. SME loans by these banks increased by 7-10% year-on-year in the first half. However, it is reported that they sacrificed profits amounting to 1.5 trillion yuan (approximately 250.82 trillion KRW) to do so. Bloomberg reported that the profits of more than 1,000 banks across China, including the four major banks, fell by 24% in the second quarter, and the scale of non-performing loans reached 2.7 trillion yuan (approximately 465 trillion KRW).

The problem is that this trend may continue into the second half of the year. The Industrial and Commercial Bank of China stated in its own report that "unfavorable conditions in the financial market such as contraction in global trade and investment, restrictions on inter-country interactions, and geopolitical tensions may persist." Citigroup predicted that "bank profits in China will decrease by about 13% this year" and that "profits of major Chinese banks will decline by more than 10% until 2022."

Moody's emphasized the high likelihood of an increase in non-performing loans, citing weak consumer sentiment. There are also views that this year’s economic growth rate of only 2% in China will be a negative factor for banks.

Judy Zhang, a Citigroup analyst, said, "Chinese banks must not only endure profit declines to support the real economy but also adopt a more conservative approach in setting aside provisions for non-performing loans."

Foreign media expressed concerns that the decline in profits of Chinese banks could lead to reduced dividends. Chinese banks typically distribute about 30% of their profits as dividends. For example, China Communications Bank reported a 15% decrease in profits in the first half of this year and is currently reviewing its dividend policy.

Standard & Poor's estimated that by 2024, the four major Chinese banks will need to secure funds amounting to $940 billion (approximately 1,110.5 trillion KRW) to meet global soundness standards.

This content was produced with the assistance of AI translation services.