China’s big banks socially distance from economy

Bank of Gansu

07/05/2020 03:54

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own. Refiles to remove comma in third
paragraph and to fix links.)
    By Pete Sweeney
    HONG KONG, May 7 (Reuters Breakingviews) - Big Chinese banks
are a bit too socially distant from their own virus-stricken
economy. Industrial and Commercial Bank of China  601398.SS 
 1398.HK  – the world’s largest lender by assets – and its
hulking peers grew their bottom lines in the first quarter even
as the country’s GDP plunged 6.8%. Such rude health suggests
they haven’t extended enough credit to private businesses in
need, which may capture Beijing’s attention.
    It always has been better to be one of the so-called Big
Four. ICBC, Bank of China  601988.SS   3988.HK , Agricultural
Bank of China  601288.SS   1288.HK  and China Construction Bank
 601939.SS   0939.HK  hog up the best state-owned clients, who
are well-stocked with collateral and insulated from default.
Their collective 72 trillion yuan ($10.2 trillion) deposit pool,
nearly 40% of China’s total, allows them to earn easy money
lending short-term funds to smaller financial institutions, too,
while bullying local bond and foreign exchange markets.
    That makes it easier to understand how they might be
insulated from China’s first formally recorded recession; their
biggest customers are, too. Thus, even as HSBC’s  HSBA.L 
 0005.HK  profit tumbled 48% from the first three months a year
earlier, for example, China Construction Bank’s rose 5% and its
non-performing loan ratio stayed flat at a modest 1.4%. Given
that financial regulators are encouraging banks to roll over
loans, defaults may hold steady. The top tier is so buffered
that S&P Global Ratings reckons Chinese banks might actually
reduce their loan loss ratios by 10 percentage points, to 190%.
    Something will have to give. Small Chinese businesses were
hurting even before Covid-19 struck, and the Big Four were under
orders to help out because they account for most of the
country’s jobs. The message does not appear to have gotten
through. Instead, the Big Four appear to be channelling funds to
state-backed employers with low headcounts - which technically
count as small business loans - plus real estate speculators and
financial institutions arbitraging interest rates. In the
meantime, smaller banks are left holding the riskiest
portfolios. They’re starting to implode; Bank of Gansu  2139.HK 
is the latest in a string seeking bailouts. ICBC and its ilk may
soon be forced to take a chance at greater exposure.
    On Twitter https://twitter.com/petesweeneypro 
    
    CONTEXT NEWS
    - Industrial and Commercial Bank of China on April 28
reported a 3% rise in first-quarter net profit compared to a
year earlier, while Bank of Communications reported a 1.8% rise.
At Agricultural Bank of China and China Construction Bank, first
quarter net profit rose 4.8% and 5%, respectively. Bank of China
posted a 3.2% rise on April 29.
    - The banking sector's collective non-performing loan ratio
climbed in the first quarter to 2.04%, the banking and insurance
regulator said, the highest level since the global financial
crisis.
    - New bank lending in China rose sharply to 2.9 trillion
yuan ($405 billion) in March, three times higher than February's
figure.
    -  For previous columns by the author, Reuters customers can
click on  SWEENEY/ 
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    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
China's biggest banks post profit growth amid pandemic, but
margins shrink     urn:newsml:reuters.com:*:nL3N2CG3FF
China March loans surge to $405 bln as coronavirus stimulus
kicks in     urn:newsml:reuters.com:*:nL3N2C00TA
BREAKINGVIEWS-Chinese GDP is refreshingly, depressingly honest  
  urn:newsml:reuters.com:*:nL4N2C508C
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Jeffrey Goldfarb and Sharon Lam)
 ((pete.sweeney@thomsonreuters.com; Reuters Messaging:
pete.sweeney.thomsonreuters.com@reuters.net))