Outbreak affects major banks' profitability, study finds

Tracy Li
China's big four state-owned banks saw slight declines in returns on average assets in the first quarter, although the full impact has not yet been recorded.
Tracy Li

Novel coronavirus disruptions have affected the profitability of China’s big four state-owned banks, but the impact is not yet reflected in their asset metrics, a new study from Moody’s Investors Service finds.

The four banks — Agricultural Bank of China Limited, Bank of China Limited, China Construction Bank Corporation and Industrial and Commercial Bank of China Ltd — reported slight declines in annualized returns on average assets in the first quarter from a year earlier.

A main force behind the drop was narrowed net interest margins (NIM), which reflects the adoption of the Loan Prime Rate (LPR) as the benchmark for loan pricing in 2019, the ratings agency noted.

This contrasts with the wider margin reported by Ping An Bank, a joint stock lender with considerably higher reliance on market funds, in the same period. Moody’s believes that the large banks’ funding costs are insensitive to the government’s efforts to guide down the LPR and interbank interest rates because of low reliance on market funds.

However, the difference in NIM trends is likely to narrow in the future to reflect limited room for lowering market interest rates from already low levels, according to the study.

Meanwhile, major players’ credit costs remained stable but elevated from January to March. The increases were modest compared with other major banks such as HSBC and Standard Chartered, the report said.

Despite disruptions from the coronavirus outbreak, loan growth was generally stronger than a year ago, which reflects big banks’ leading role in effecting government policies to support the economy, and the trend is expect to continue this year, Moody’s added.

The four lenders account for more than 32 percent of the banking system’s corporate loans, suggesting that the system’s corporate loan growth could outpace retail loan growth this year for the first time since 2015.

The four banks reported headline non-performing loan ratios that were mainly stable in the quarter and Moody’s study estimates their capital will remain stable as profitability, despite the latest narrowing, will support risk-weighted asset growth in the low-teen percentage range.

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