By Mike Bird
China's four largest listed banks reported growing profits in first-quarter earnings out this week, even after the collapse in economic activity caused by the coronavirus pandemic.
The impressive ability of major banks to weather the storm won't last the year. There is a direct and awkward trade-off between Chinese banks' asset quality and the support they provide to the economy in a pinch. The cost of their national service will eventually weigh on results one way or another.
Agricultural Bank of China Ltd., China Construction Bank Corp. and Industrial and Commercial Bank of China Ltd. reported net profit growth of 4.8%, 5.1% and 3%, respectively, compared with the same quarter a year earlier. Bank of China Ltd.'s profits were practically flat year-over-year after increased impairments were accounted for.
A rise in earnings might seem unbelievable. Bank profits elsewhere in the world -- and those at overseas banks operating in China -- are collapsing. But being a lender in an economy where credit allocation is often determined by politics, rather than risk, has its advantages during a pandemic.
Perhaps, however, only in the short term.
The figures to keep an eye on as the year goes on are net interest margins and nonperforming loans. Already shrinking margins ticked slightly lower at three of the four, while remaining flat at ICBC. The nonperforming loan ratio was little changed, though the NPL formation ratio -- a measure of how quickly new bad loans are forming -- did tick up at ICBC. Bank of China didn't report NPL figures.
The first quarter figures don't likely show the full story. UBS research published in March suggests that cheap prices of Chinese bank stocks, which trade at a fraction of their book value, imply an NPL ratio of more like 10% to 12% for major lenders.
New nonperforming loans will be recognized slowly, with major banks pressured to offer forbearance to clients at least until the worst of the economic pressure has ended. Credit-ratings firm Fitch expects the ratio of recognized nonperforming loans to rise to 3.5% this year from 1.5% in June last year, among the banks it analyzes.
Large national banks aren't that exposed to the small- and medium-size private sector businesses that will suffer the worst of the economic damage, but as major state-owned institutions, they are first in line to support smaller and regional lenders which fall into distress.
The coronavirus-related shock for China's major banks hasn't fed through to their results immediately, but it will weigh on them eventually. Delaying recognition of the problem may make the hangover even longer.
Write to Mike Bird at Mike.Bird@wsj.com