Growth Dragons Weekly: China's Bank Results Display Resilience, Containing Property Sector Meltdown

What happened in China this week:

1. China's Bank Results Display Resilience, Containing Property Sector Meltdown

2. Apple’s China Woes and Baidu’s AI Scores a Win

3. Haier and Midea Grew More than 7% Despite Property Slowdown

4. BYD’s Finances Showing Strains From Price Cuts

5. AI-Chip Horizon Robotics Filed For IPO

#1 China's Bank Results Display Resilience, Containing Property Sector Meltdown

The top China banks like Agricultural Bank of China (ABC), China Construction Bank (CCB), Bank of China (BOC), China Merchants Bank (CMB) and Industrial and Commercial Bank of China (ICBC) have reported earnings this week.

The property downturn is affecting the balance sheet of the nation’s largest state banks. For instance, ICBC saw its bad loans from residential mortgages rise by 9.6% to 27.8 billion yuan. CCB saw a 10.81% increase in its domestic real estate loans to 853 billion yuan. The real estate loans amongst these banks average around 5% of their total loans. Only CMB experienced a large 13.8% decrease in property sector exposure.

Despite the bad loans these banks have experienced steady growth, suggesting their resilience amidst a difficult economic environment. These banks serve as an important pillar for financial liquidity and have been consistently shoring up the market. However, Beijing’s recent call to lower lending rates and increase support to developers will mean that earnings will remain lackluster for 2024. This is due to high likelihood in growth of bad debt and lower net interest margins. A good way to monitor their loans would be to check their non-performing loan ratio, to ensure the banks are maintaining solvency while increasing exposure to the developers. ICBC’s non-performing loan ratio fell by 0.77% since the beginning of 2024 as mentioned by ICBC’s vice-president Wang Jingwu. This suggests good risk management by the financial institution.

Next, the capital adequacy ratio of China Merchant bank, Bank of China, ICBC, China Construction Bank and Agricultural Bank of China capital adequacy ratio were 17.9%, 15.1%, 19.1%, 17.95% and 17.14% respectively. This suggests that ICBC is the best positioned bank financially since the bank has more available capital against the bank’s risk weighted credit exposures.

We anticipate that earnings for 2024 will diminish further due to a reduction in net interest margin. This is expected to be offset, to some extent, by stronger loan growth aimed at stimulating economic expansion. Analyzing these banks' financial statements in 2024 will primarily involve assessing their profitability and asset quality, which are key indicators of their risk management effectiveness and the overall health of the economy. Despite the challenging period for the banks, the results have been positive, indicating that the banks have remained resilient from the fallout of the property sector meltdown.

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