China Insider: China’s Five Largest State-Owned Banks Face Worsening Bad Debts

November 4, 2020 Updated: November 4, 2020

The Q3 financial reports of China’s five largest state-owned banks showed that their profits have deteriorated and bad debts have increased. Analysts believe that as China is in the midst of an economic downturn, these major banks’ bad loans cannot be recovered, and the increase in bad debts will likely trigger a financial crisis.

The Q3 financial reports of China’s five largest state-owned banks showed that their profits have deteriorated and bad debts have increased. Analysts believe that as China is in the midst of an economic downturn, these major banks’ bad loans cannot be recovered, and the increase in bad debts will likely trigger a financial crisis.

These five banks released their Q3 financial reports on Oct. 30. The net profits have fallen sharply, while non-performing loans have kept rising. The net profit of Bank of Communications in the first three quarters fell by 12.36% year-on-year, and the non-performing loan ratio was 1.67%, an increase of 0.2 percentage points from the end of 2019. Bank of China’s net profit fell by 8.7% year-on-year. Its total asset suffered a loss of $14.9 billion, 60% more than last year’s asset loss. Total liabilities increased  8.68% from the end of last year to $3.4 trillion. The non-performing loan ratio was 1.48%, an increase of 0.11 percentage points from the end of 2019. ICBC’s net profit in the first three quarters fell by 8.91% year-on-year, and its non-performing loan ratio was 1.55%; Agriculture Bank’s net profit in the first three quarters fell by 8.7% year-on-year, and non-performing loan ratio was 1.52%, an increase of 0.12 percentage points from the end of the previous year. The net profit of China Construction Bank for the first three quarters also fell 8.66%, and the non-performing loan ratio was 1.53%, an increase of 0.11 percentage points from last year.

Yu Weixiong, economist at the UCLA Anderson School of Management: “China’s GDP growth is largely dependent on issuing unlimited loans, but the profits made from these loans are getting lower and lower. As a result, the gains for China’s five largest state-owned banks are declining. When Chinese authorities report that these banks’ profits are continuously deteriorating, it means the authorities do not want to expose the financial problems all at once, and they want the public to gradually and slowly accept the situation.” 

Chinese state media also revealed that in the first half of this year, at least 1,300 bank branches were closed and the five state-owned banks had a combined layoff of 26,000 employees. 

Frank Xie, business professor at University of South Carolina-Aiken: “The Chinese Communist regime’s state-owned banks are profiteering industries. For so many years, their profits have been very, very high, higher than their counterparts in other countries. This is because they are not normal banks, they are state-owned monopoly banks.  But now they are also experiencing huge losses, an indication that most of their loans cannot be recovered, and too many bad debts will lead to a deficit. This situation reveals from another angle how severe China’s economic recession is. It is a very critical signal, and a very dangerous thing. It is related to the overall decline of the Chinese economy.”

In addition, among China’s 36 A-share listed banks, 21 had a decline in net profits in the first three quarters, and stock prices of 26 banks fell below their net asset values. There are also 14 city commercial banks. Among them, 12 experienced deterioration in their year-on-year net profit growth in the first three quarters. 

China has a large number of non-listed banks, about 100 of these banks released their Q3 financial reports. Nearly 75% reported losses, and 31 banks had a net profit drop exceeding 10% year-on-year. 

Frank Xie: “Many export-oriented Chinese companies have either gone bankrupt or shut down. Other domestic-oriented, so-called ‘inner circulation’ companies, also face the problem of inadequate profits. The loans issued to these companies and to the real estate industry are all obtained from these banking systems. When these companies go bankrupt, bank loans will inevitably default, and banks’ profits will definitely fall.”

Frank Xie, a business professor at University of South Carolina-Aiken, believes that although these state-owned banks and Chinese companies are suffering losses in recent years, Chinese communist officials have already made a big fortune for themselves. 

Frank Xie: “The CCP will certainly try every possible means to prevent these state-owned banks and state-owned companies from going bankrupt, because they are state-owned. So China’s Central Bank kept printing money to help these banks survive. In fact, when the CCP kept printing money, the losses were transferred to ordinary Chinese citizens. It is only that the citizens are suffering the losses indirectly, and it’s not easy for them to see through the causal effect on the surface.” 

On Aug. 16, Guo Shuqing, Chairman of China Banking and Insurance Regulatory Commission, admitted in an article in Qiushi magazine that the current book value of the banks’ expected profits is largely inflated because bad assets will gradually surface and bad debts may continue rising.

In early September, CNBC quoted a report issued by Fitch Ratings, stating that in the first half of this year, the net profit of Chinese banks fell 9.4% to around 1 trillion yuan ($146.2 billion), compared with the first half of 2019. Fitch warned that many challenges remain and the pressure on Chinese banks’ profitability could persist into the next year.