China Banks Soar as Economic Recovery Takes Hold

Experts predict that China’s listed banks will experience steady growth in their financial results this year as the economy continues to recover and banks make a concerted effort to provide credit. Dong Ximiao, the chief researcher at Merchants Union Consumer Finance Co., says that the listed banks are expected to see net profit growth of over 5% on average in 2023 and their net interest margins are expected to stabilize at around 2%.

The rise in credit demand will be aligned with the overall economic recovery, which may see a slow start at the beginning of the year but will pick up pace as the year progresses. Full-year new credit is estimated to reach around 24 trillion yuan ($3.55 trillion). Dong believes that strong measures will be taken to support corporate loan growth, household loan growth, and faster growth of total credit, thereby supporting economic and social development.

The People’s Bank of China, the central bank, is expected to further lower the reserve requirement ratio for banks and interest rates, such as its benchmark lending rates, to encourage consumer willingness and ability to increase housing consumption. As of Tuesday, 16 banks in China had announced their preliminary earnings estimates for 2022. Fourteen of these banks posted double-digit net profit growth, with eight recording growth of over 20%.

This growth in net profit can be attributed to fast credit expansion by more than 10% and cost reductions, including a decrease in risk-related costs due to strengthened efforts to write off non-performing loans and set aside adequate allowances for loan impairment losses. Zeng Gang, director of the Shanghai Institution for Finance & Development, says that the upturn in China’s real economy will boost credit extensions in 2023 and banks’ interest-earning assets will expand more rapidly than last year.

The narrowing of net interest margins for banks is expected to stabilize this year as many banks have already started lowering their deposit rates while demand for funds may stabilize their lending rates. China’s banking sector may also face lower pressure this year in terms of non-performing loan formation, which will not be a hindrance to banks’ financial results.

For banks to achieve better performance this year, they must support the real economy, which means focusing credit extensions on expanding domestic demand and consumption. This includes supporting small businesses and the private sector to ensure stable employment. The net profit growth of listed banks is expected to repair in 2023, but a divergence among banks will remain.

The Chinese banking sector will continue to face downward pressure on net profit margins as mortgage loans are repriced and banks sacrifice some of their profits to support the real economy. However, with strengthened efforts to stabilize the economy, China will see an increase in credit demand, and the banking sector will increase credit extensions to better serve the real economy. The People’s Bank of China will also step up support for the banking sector through structural monetary policy instruments to guide the flow of credit funds.