Beijing’s push to ease lending raises fears of squeeze on bank margins

A surveillance camera is seen near a lion statue outside a bank on Financial Street in Beijing, China July 9, 2021. REUTERS/Tingshu Wang

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SHANGHAI, June 8 (Reuters) – Beijing’s mandate to help virus-hit sectors has left China’s banking sector lagging behind a broader market rally as the economy reopens, with investors fearing “A splash of cash by lenders only increases bad debts and squeezes already wafer-thin margins.

The easing of monetary conditions in China – at odds with the policy stance in most countries – is designed to revive growth and has sparked a robust rebound in equities.

Over the past month, as COVID-19 rules have been relaxed in Shanghai and Beijing, the blue-chip CSI300 index (.CSI300) has risen almost 8%, while the STAR 50 index focused on technology (.STAR50) jumped more than 18%.

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However, the CSI300 banking index (.CSI000951), which tracks the “big four” state banks and other lenders, including the local government-controlled Shanghai Pudong Development Bank (600000.SS), lost 0. 7% over the same period due to concerns about the financial health of lenders.

Last week, the China Banking and Insurance Regulatory Commission (CBIRC) urged banks to step up their support for businesses affected by COVID, allowing for greater tolerance for bad debts.

Chinese lenders face “an increasingly obvious trade-off between staying profitable and supporting the economy,” said Natixis economist Gary Ng. The mandate to help the economy will mean that banks will have to “sacrifice their profitability…to help businesses and households”.

Banks’ net interest margin has already fallen to 2.04% in the first quarter, from 2.1% in 2020, and will likely be further reduced, he said.

In late May, the People’s Bank of China (PBOC) urged banks to “raise their political stance” by implementing stimulus measures, and called for an incentive mechanism that would allow “willing” and bold to lend to small businesses.

The calls from regulators come amid signs that risk-averse banks are putting money into low-risk, short-term financial instruments, pushing those yields towards zero. Read more


Xie Chen, fund manager at Shanghai Jianwen Investment Management Co, says monetary easing is a double-edged sword for banks.

As credit expansion increases incomes, “if you cut lending rates without a commensurate reduction in deposit rates, profitability will naturally fall,” Xie said.

Banks’ very low valuations show that the market expects write-offs of non-performing loans, he added.

China-listed lenders trade at 5.18 times earnings and 0.65 times book value, making banking the cheapest sector in China, where consumer staples trade at an earnings multiple of 38.4.

Chinese banks are also much cheaper than the 9.74 times earnings and 1.03 times book value average of global banks in the Refinitiv Global Banks Price Returns Index (.TRXFLDGLPUBANK).

As a result, some investors say the pessimism toward Chinese banks is overdone.

“The current valuation of banks is so low that it seems to factor in large-scale bankruptcies in the sector,” said Dong Baozhen, fund manager at Lingtong Investment, who deemed such a scenario unlikely.

Despite the recent rebound, “the bubble in Chinese tech stocks is bursting and money will eventually flow into low-value bank stocks,” he added.

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Reporting by Samuel Shen, Jason Xue and Andrew Galbraith Editing by Vidya Ranganathan and Jamie Freed

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