BEIJING/SHANGHAI (Reuters) - China's largest state-owned banks are readied for rising bad debt and increased margin pressure in the months ahead as forbearance policies designed to give borrowers breathing space during the coronavirus crisis expire.
All five banks, which have been raising provisions to counter expected losses due to rising soured loans, have reported their biggest profit falls in at least a decade.
"The external challenges in the second half are unprecedented," Bank of China Ltd (BoC) President Wang Jiang said on Monday.
Their forecasts highlight the impact of the pandemic and the economic slowdown on China's banks, which have been asked by Beijing to step up and lend to flagging sectors, while sacrificing profits in a bid to revive the country's fortunes.
Borrowers are struggling to repay debt after months of lockdown and some sectors, such as those in the travel industry, are battling to survive under the shadow of coronavirus.
Second-quarter loan-loss provisions were up 61% to 436% compared to the same period last year at ICBC, CCB, AgBank and BoC, data from China International Capital Corp (CICC) showed.
The crater in first-half profit was mostly down to provisioning ordered by regulators, CICC said, noting that second-quarter profit growth would otherwise have been 1.5% to 5.1% for those four lenders.
"As forbearance policies that help companies to recover expire in the first half of next year, the impact of non-performing loans will increase," Chief Risk Officer Jin Yanmin of China Construction Bank Corp(CCB) said during a news briefing.
Agricultural Bank of China (AgBank) President Zhang Qingsong said bad loan pressure was rising, as short-term policies aimed at keeping firms afloat expired, adding its profit growth faces pressure from a "declining loan prime rate, fee cuts and an increase in loan loss provisions".
Ji Zhihong, CCB vice president, predicted that net interest margins, a key profitability indicator, will narrow further.
Industrial and Commercial Bank of China (ICBC), the world's largest commercial lender by assets, will face higher pressure on loan risk controls in the second half and will increase efforts on provisions to guard against "significant turbulence," its vice president Liao Lin said.
Overall, Chinese commercial banks recorded a 9.4% drop in first-half net profit to 1 trillion yuan, data from the China Banking and Insurance Regulatory Commission showed.
By the end of the June quarter, the average non-performing loan ratio for commercial banks was at 1.94%, data from the commission showed, the highest since 2009.
And banks are likely to keep boosting provisions in the third quarter, Everbright Securities analyst Wang Yifeng said.
However, CICC analysts said the first-half is likely to mark the start of the sector's bottoming-out and they expect the industry to post profit growth again in 2021 as economic activity gradually recovers.
Non-performing loan (NPL) ratios rose at the big five banks during the reporting period, with ICBC's increasing to 1.5% by the end of June from 1.43% three months earlier, and that of CCB rising by 0.07 percentage points in second quarter to 1.49%.
"Consumer behavior changes and reshuffle of industries accelerated by the pandemic will have an uncertain impact on the economy," Moody's Investor Service analyst Nicholas Zhu said.
In the second half and early 2021, big banks are expected to step up the sale of capital bonds to help counter deteriorating asset quality, Zhu said.
China's biggest banks still have a estimated shortfall of $500 billion by 2025 to meet global capital requirements, Moody's estimates.
Net interest margin (NIM) - a key gauge of bank profitability - fell at ICBC, BoCom, CCB and AgBank, although it improved slightly at BoC.
($1 = 6.8455 Chinese yuan renminbi)
(Reporting by Cheng Leng and Zhang Yan in Beijing，and Engen Tham in Shanghai; Editing by William Mallard, Christopher Cushing and Alexander Smith)