Central Bank Researchers Warn of Negative Growth in Chinese Banking Profits

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A research team from the People’s Bank of China (PBOC) anticipates a poor faring for the Chinese banking sector in 2020 as a result of the economic impacts of the COVID-19 pandemic.

A report prepared by PBOC researchers points to net profits of 600.1 billion yuan for the first quarter of 2020, for YoY growth of 5%, and a deceleration of 4.4 percentage points compared to the same period last year.

Despite the economic impacts of COVID-19 banking sector assets saw a marked expansion, reaching 244.42 trillion yuan in total as of the end of the first quarter, for an expansion of 23.81 trillion yuan compared to the same period last year.

In the first quarter alone banking sector assets expanded 12.08 trillion yuan, accounting for over half the expansion for the past four quarters.

Management costs are also low at Chinese banks, with China’s commercial banks posting an average cost-revenue ratio of under 30% in recent years, and just 25.69% for the first quarter.

Despite these sanguine indicators PBOC researchers do not forecast a strong performance for the Chinese banking sector, giving the economic impacts of COVID-19 upon China’s economy as a whole.

“Despite the profits of Chinese banks being comparatively large in absolute terms, profit growth is slowing overall, and profitability is declining.

“In the first quarter the net interest rate spread was 3.1%, for a decline of 7 basis points compared to the same period last year. Rates of return on capital were 12.09%, for a decline of 115 basis points compared to the same period last year.

“Rates of return on assets were 0.98%, for a decline of 4 basis points compared to the same period last year.

“The net interest rate spreads of Chinese commercial banks are at middling levels internationally – higher than Asian banks, and lower than the average levels for North American and European banks.

“In terms of ROE and ROA, profitability is close to that for large European and North American banks, and not especially high.”

The researchers point to latency in the onset of non-performing loan risk as another important factor, given the lack of complete synchronisation between economic and financial cycles in China.

As a consequence PBOC researchers said that “bank profit growth could slide,” and they could not “exclude the possibility of zero growth or negative growth this year.”

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