Profits for China’s banking sector shrunk 24.6% YoY in Q2, pushing down overall net profits to a 9.9% YoY contraction in the first half of the year. Performance across various bank types was mixed on the back of repercussions from the “national service” play out. Lower profits were mainly caused by higher provisions taken, which surged 34.4% YoY as at end-1H20. City banks performed the best as net profit only edged down 3.1% YoY in Q2.
Asset quality performance varied across different bank types, with SOEs and rural commercial banks continuing to suffer asset quality impairment in Q2. The NPL ratio of SOEs rose 6 basis points (bp) QoQ to 1.45%, whilst provision coverage ratio fell 3 percentage points (ppt) QoQ to 228% compared to Q1. Joint-stock banks (JSBs) and city banks registered lower NPL ratios at -1bp QoQ and -15bp QoQ, respectively, on the back of more robust provision coverage. This was impressive given the challenging economic conditions induced by the COVID-19 pandemic. Another point of concern is capital adequacy, as Zheng and Kong expect some banks to encounter capital shortfall. Lenders have traditionally replenished capital from profit growth, but this looks increasingly unlikely in 2020.