China’s top banks to report weak results as economy slows, defaults rise

The top five banks in China are likely to announce disappointing results in several areas of their operations, with an economic slowdown and flat wage growth eroding quarterly profits.

At the top of China’s financial system sit ICBC and CCB, whose combined assets with the other big banks amount to more than Rmb190 trillion, roughly $26.5 trillion. However, analysts expect the second-quarter results of China’s top lenders to show more households falling behind on loan payments.

Moody’s Zhu says reduced consumer spending is restructuring banks’ credit demand and quality

Expectations are that the top Chinese leaders will see a decline in performance. Bloomberg estimates that the banks’ average net interest margin will likely drop to 1.29%, following a record trough in the first quarter. 

Nicholas Zhu, vice-president and senior credit officer at Moody’s, even commented, “A receding property market and tightening consumer spending are reshaping banks’ credit demand and credit quality.” 

He further noted that banks are facing higher credit risks in mortgages and retail lending, which have historically acted as a buffer against risk. He characterized the shift, where these exposures now appear riskier than corporate loans at some banks, as both structural and concerning.

China’s economy is still struggling under deflationary pressure, with real wages at non-state firms growing a meagre 1.7% this year. Adding to the strain, a deepening real estate crisis has shaken consumer confidence in a nation where homes comprise most household assets. Beijing has been pushing households to borrow more to boost spending and ease deflationary pressure, but demand hasn’t picked up.

Central bank figures show short-term consumer loans, often used for everyday purchases, fell again in July, down to Rmb9.8trillion, about $1.4 trillion. However, with stronger borrowers pulling back, banks face riskier clients, according to Zhu. ICBC’s bad consumer loans topped Rmb 10 billion in March — twice last year’s — with its NPL ratio at a record 2.39%

Loan defaults have increased significantly since the end of 2023

Consumer loan defaults at China Construction Bank and Agricultural Bank of China increased for the third consecutive quarter in March, with total defaults across the three major lenders more than doubling since the end of 2023. However, the defaults and ultra-low rates of roughly 3% have cut significantly into banks’ returns. Net interest margins have now been on a downward path for over three years, having fallen below 2% after 2021.

Additionally, first-quarter data show retail banks sold Rmb37 billion of bad debt, an eightfold increase from a year earlier. Most of it came from consumer loans, with credit card and small business debt making up the rest. According to analysts, Beijing has chosen not to pursue forceful monetary easing for fear of weakening banks further, preferring slower rate cuts and interest payment subsidies to support credit demand.

Richard Xu, Morgan Stanley analyst, noted, “The policy stance has reached a point where it will no longer overly sacrifice bank profits to shore up growth.” Though Xu warned that the bad-loan ratio will probably rise in the coming quarters before easing.

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