The comments come as five of the country's largest state-backed lenders posted estimate-beating fourth-quarter profit - but they bode ill for smaller lenders, who have less capital reserves and can call on fewer state borrowers.

The virus outbreak, which began at the end of last year, has left many airlines, hotels and other businesses fighting to survive after government countermeasures all but paralysed economic activity for more than a month.

Industrial and Commercial Bank of China Ltd (ICBC), China Construction Bank Corp (CCB) and Bank of Communications Co Ltd (BoCom) - posted annual profit growth of over 4% for 2019 due in part to improving asset quality.

A prolonged pandemic might break the upward trend with rising soured debt and shrinking net interest margins (NIM), a gauge of banks' profitability, senior bankers said.

"We expect there will be an increase in overdue loans in the first quarter and first half," Bank of China Ltd's Chief Risk Officer Liu Jiandong said after the lender published annual results on Friday. The bank's president added that the impact is likely to be short-term and controllable.

ICBC President Gu Shu likewise said the outbreak "will put some pressure on our asset quality," but that the lender is confident in its overall situation.

Big-bank confidence is down in part to plush capital reserves which can help ease the impact of a downturn.

The provision coverage ratio at ICBC was 212.53% at the end of December, compared with 198.09% three months prior. CCB's ratio rose to 227.56% from 218.28% in the same period.

China's largest banks have also benefited from preferential government policies such as support to tackle bad loans. They often lend to the biggest state-owned firms which are less risky and which helps buoy profit even during economic downturn.

TOUGHER TIMES

Smaller lenders, by comparison, have had a tougher time.

Inner Mongolia lender Baoshang Bank Co Ltd [BAOTO.UL] was rescued by the government in May and there was a run on Yingkou and Yichuan Rural Commercial Bank in November.

"We estimate non-performing loans will total 250 billion yuan ($35.23 billion) in the best-case scenario as a result of the (coronavirus) outbreak," said analyst Liao Zhiming at TF Securities.

Smaller banks with lower capital reserves are likely to struggle the most.

"The pattern of low provisions, high non-performing loans and high overdue loans suggests rural commercial banks are short of capital," Gavekal Dragonomics said in a client note.

On Monday, Moody's Investors Service changed its outlook on six Chinese banks, including Bank of Nanjing Co Ltd and the Bank of Ningbo Co Ltd, to negative, citing the impact of the virus through exposure to highly affected industries such as manufacturing and trade.

Meanwhile, Harbin Bank's net profit for 2019 tanked 36% on-year, the lender said in its annual results on Monday.

"2019 was an extraordinarily difficult year for city commercial banks," said chairman Guo Zhiwen.

Overall, banks' NIM is likely to keep narrowing, bankers and analysts said, as the government and central bank urge lenders to sacrifice profit to support companies during the downturn.

At BoCom and the Agricultural Bank of China Ltd (AgBank),, the NIM was slightly wider at the end of December than three months earlier. It narrowed at ICBC and CCB and was steady at BoC.

CCB expects to see a 10 bps decline in NIM in 2020 said the bank's CFO Xu Yiming at a press conference on Monday.

Senior BOC and ICBC officials also flagged risk relating to recent global market turmoil, saying contingency plans would be in place to curb credit and operational risk abroad.

By Cheng Leng and Engen Tham