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Economic and Market Commentary

Chinese Financials Feeling the Squeeze Amid Sluggish Credit Demand

Following strong double-digit profit growth in FY2021, we expect Chinese banks will be less profitable this year as COVID-19 lockdowns continue to disrupt China’s economy.

Chinese banks are facing increasing pressure on fundamentals after weak earnings growth in the first quarter of this year, dragged down by plunging credit demand amid renewed COVID-19 waves, China's Property Sector Slump: Is Recovery on the Horizon? and global macroeconomic uncertainties. We think the sector will be less profitable this year, with 1Q numbers indicative of the full-year trend.

In April, the balance of yuan-denominated loans to the real economy increased by just 362 billion yuan to 200.2 trillion yuan, a 72% year-on-year contraction versus a 1.3 trillion yuan jump a year earlier. As a result, for the January-April period, the 8.7 trillion net increase in total loan balance was 5% lower than the same period in 2021.

State-owned enterprise (SOE) banks — including the “Big Four” (see Figure 1) — saw their year-on-year growth of net profits fall to mid-single digits in 1Q 2022 versus double-digits in FY 2021, which was due in part to a low base in FY 2020 (when profits fell by 2.7%). Net income margins (NIM) continued to narrow, while fee income growth slowed substantially with dampened demand for wealth management products due to weak capital market performance.

While the central government has pledged additional targeted steps to stimulate the economy, uncertainty remains as China pursues its dynamic zero-COVID strategy. We expect banks’ fundamentals to worsen in the next few quarters, driven by narrower top-line margins due to the “fee reduction and profit concession” policy and likely more material asset quality deterioration.

Figure 1 is a table listing the year-on-year net profit growth of China’s four major banks in the first quarter of 2022 versus financial year 2021. Agricultural Bank of China Ltd posted 7.4% in 1Q 2022 vs 11.8% in FY 2021; Bank of China Ltd 7.0% vs 12.0%; China Construction Bank Corp 6.8% vs 11.6%; and Industrial & Commercial Bank of China Ltd 5.7% vs 10.0%. Data is within the table and the source of the data is Reuters.

COVID lockdowns curb borrowing

The slowdown in loan growth was more pronounced in the retail segment, particularly consumer and personal business loans, reflecting curbed consumer demand amid China’s dynamic zero-COVID strategy.

Demand for mortgages shows no signs of meaningful recovery yet despite some China's Property Sector Slump: Is Recovery on the Horizon? , with the balance of mortgages (including residential mortgage-backed securities) contracting in April by 87.7 billion yuan month-on-month to 40 trillion. The 460 billion yuan net growth in mortgages in 1Q 2022 was far below the 1.28 trillion yuan recorded in 1Q 2021.

Corporate loan growth, meanwhile, has been relatively stable. The People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) in late May urged local banks to extend more loans to small firms, as well as companies involved in green development, technological innovation, energy supply and water infrastructure.

Banks sticking to targets in spite of slowdown

For now, banks are not planning to revise down their full-year loan growth target of around 20 trillion yuan for the whole banking sector in spite of the sharp slowdown, as they expect demand to stabilise in the second half of 2022 when central government stimulus begins to take effect.

At the same time, however, they acknowledge that credit demand is weak, especially in the retail segment. They are also cautious about their guidance on NIM and fee income trends.

In the near term, we expect banks will try to pump up loan volumes via short-term discounted bills to meet their loan targets. The dynamic is already in play: The balance of discounted bills (which accounted for 9% of corporate loans) grew by 37% year-on-year in April to 11.2 trillion yuan.

In terms of asset quality, non-performing loans (NPL) are unlikely to rise substantially in the next few quarters, partly owing to forbearance granted to some lockdown-affected borrowers as well as property developers. In fact, the Big Four saw their NPL ratios hold steady in the first quarter in a range of 1.3% to 1.4%. That being said, weakened housing and consumption demand could point to a multi-year NPL resolution cycle in the longer term.

Investment implications

In our view, valuations for the senior credit of the SOE banks seem rich, and we see more attractive relative value in senior credit of SOE banks’ overseas subsidiaries, which enjoy strong parental support and offer decent extra yield compared to credit directly issued by their parent banks.

For a detailed picture of our outlook for China’s property sector, please read our recent blog, ‘China's Property Sector Slump: Is Recovery on the Horizon? ’.


[i] Source: People’s Bank of China (PBOC). RMB loans are part of the Aggregate Financing to the Real Economy (AFRE), which data are from the organizations including the PBC, CBIRC, CSRC, CCDC and NAFMII.

[ii] The national “fee reduction and profit concession” policy is aimed at reducing the operating costs for small and medium-sized enterprises, through measures such as cutting loan interest rates and reducing/exempting service fees.

[iii] Source: PBOC, PIMCO.

[iv] Source: PBOC

[v] Source: Bloomberg

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