China’s Banks Lost Billions In Defaulted Loans, Set Aside Cash For More

Five of China’s largest state-owned lenders reported their biggest profit losses in at least a decade, as the number of defaulted loans has skyrocketed since the onset of COVID-19.

CNBC reported that the Bank of China, Bank of Communications, China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China posted at least 10 percent year-on-year declines from January through June.

During the year’s first two quarters, these lenders have also set aside more cash in expectation of forthcoming loan losses. In addition, the Beijing government has asked banks to forfeit 1.5 trillion yuan ($219 billion) in profits by decreasing lending rates and deferring loan repayments in a bid to help companies, CNBC noted.

The action has put these banks at the forefront of the nation’s effort to ease the impact of the coronavirus on businesses and families. 

“The banks have been asked to perform [a] national service,” Jason Tan, research analyst at CreditSights, the New York-based market insight firm, told “Squawk Box Asia” on Monday (Aug. 31). “They’ve been asked to support the economy at the expense of their own operational strength.” 

Still, Tan noted that the total amount of the losses is unclear, as more losses are expected from July through December – and perhaps the first half of 2021, when loan moratoriums expire.

“The brunt of the asset quality pressures might not have come through yet because of the still existing moratorium on the repayment of loans as well as its interest payments,” Tan told the network. 

While a Morgan Stanley earnings report revealed that mid-sized Chinese banks performed better than their larger competitors by as much as 27 percent in the second quarter, analysts at Jefferies Group LLC, the New York investment bank and financial services company, said Chinese banks are unlikely to issue dividends after setting aside cash for potential losses.  

Last week, in a preview of what was to come, Hong Hao, managing director of BOCOM International, a subsidiary of Bank of Communications, told Reuters that the pandemic has hit small businesses hard and that the balance sheets won’t be pretty. “Banks had it easy in the past, but now many signs indicate they’re under great pressure,” he said.

As far back as April, China’s banks were already facing mountains of bad debt. In light of the crisis, regulators let them be more lenient with how bad debt was classified. Meanwhile, lenders were allowing small businesses to defer payments and roll over on debt.