Chinese banks are set to deliver year-on-year earnings growth of 5 to 10 per cent when they report first-quarter earnings on Friday, due to a record level of loans and supportive measures by the central bank that minimised the impact of the country's slowing economy.

The state-owned banks set to report earnings Friday include Bank of China, China Construction Bank, the Industrial and Commercial Bank of China, Bank of Communications, Agricultural Bank of China, and Postal Savings Bank of China.

China's first-quarter gross domestic product (GDP) rose 4.8 per cent year-on year - just before the Omicron variant began grinding the major financial hub of Shanghai to a halt with a coronavirus lockdown imposed on April 1.

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Banks' lending in the first quarter rose to a record 8.34 trillion yuan (US$1.3 trillion), up 8.7 per cent from the previous record of 7.67 trillion yuan in the first quarter of 2021. That vigorous business and improved interbank liquidity conditions during the first three months meant that banks were able to keep their net interest margin - a key gauge of profitability - largely stable, analysts said.

The central business district in Beijing pictured on Nov. 23, 2021. Photo: Bloomberg alt=The central business district in Beijing pictured on Nov. 23, 2021. Photo: Bloomberg>

"Most banks have heeded the government's call for achieving stable economic growth this year and they have dialled up their lending to businesses during the first quarter," said DBS' analyst Lu Minyi. "We expect leading state-owned banks to report profit growth of below 10 per cent."

The People's Bank of China (PBOC) cut the reserve requirement ratio, or deposits that banks must park at the central bank, by 50 basis points in December lowering that ratio for major commercial banks to 8.4 per cent.

The move reduced the cost of funding for banks by 15 billion yuan per year as it released 1.2 trillion yuan worth of long-term liquidity into the interbank system. The PBOC made another quarter percentage point cut in the ratio in April.

For the first quarter, banks are also likely to report that their non-performing loan (NPL) ratio remained stable compared with the end of last year, minimising their burden from charges for impaired loans.

However, going into the second and third quarters, the amount of delinquent loans is likely to pick up again, said Chen Shujin, an analyst at Jefferies.

Chinese banks generally consider a loan to be NPL once the loan, whose repayment is deemed doubtful, is overdue by more than 60 days. This makes NPL ratios a lagging indicator of the state of the economy.

"The liquidity issue miring the property sector since last year would become more obvious this year in the banking sector, which will show up as a higher NPL ratio in the property development sector," said Chen. "This is likely to come with an overall pickup in corporate and retail NPLs due to the slowing economy."

Unfinished residential buildings at the Evergrande Oasis, a housing complex developed by Evergrande Group, in Luoyang, China, pictured on September 15, 2021. Photo: Reuters alt=Unfinished residential buildings at the Evergrande Oasis, a housing complex developed by Evergrande Group, in Luoyang, China, pictured on September 15, 2021. Photo: Reuters>

Many Chinese banks are creditors to troubled developers such as China Evergrande and Fantasia Holdings, which have missed payments to bondholders. Banks are exposed to the sector through direct loans to developers and mortgage loans tied to homes they build.

NPL for the entire banking sector stood at 1.79 per cent during the quarter, down 0.03 percentage point from the beginning of this year, according to the CIBRC. Historically, whenever China's economic growth declined by 2 percentage points, bank NPL ratios would rise, Chen said.

A medical worker collected a sample from a woman at a testing site in Beijing's Xicheng district on April 27, 2022. Photo: Reuters alt=A medical worker collected a sample from a woman at a testing site in Beijing's Xicheng district on April 27, 2022. Photo: Reuters>

For the full year, Beijing has targeted GDP growth of around 5.5 per cent. That forecast predates the Omicron wave that struck Shanghai, disrupting manufacturing and consumption.

With cumulative infections at 534,000, about 2 per cent of the city's 25 million people have been infected. Shanghai's case numbers are now in a sustained decline, but concerns over an outbreak in Beijing, which recorded its highest new-case total Wednesday, are now rising.

BNP this month revised down its 2022 China GDP forecast to 4.5 per cent, from 4.9 per cent, reflecting the impact from the country's strict zero-Covid strategy as it battles to contain the outbreaks. The company said the current wave has had a deeper impact on China's economy than the previous rounds, citing widespread disruptions in production, logistics, and transport.

"Economic growth is likely to be negative in April, low in May, and a recovery not seen until June," its economists, including Chen Xindong and Jacqueline Rong wrote in a report.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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