China Construction Bank spent the year doing what it does best under the leadership of chairman Tian Guoli: lending to other big state enterprises, watching the income roll in, and keeping its non-performing loan ratio low.
It might be boring – but boring can be good.
The Beijing-based lender posted a net profit of Rmb223 billion ($36.5 billion) in the first three quarters of the year, up 12.3% year on year. Revenues rose 9.3% over the same period, to Rmb624 billion, with fee income up 6.2%.
Net income in the third quarter came in at Rmb78.9 billion, up 15.7% over the previous year: driven, Nomura said in a research note dated October 31, by strong trading income and lower impairment losses.
Trading income leapt 554% in the third quarter year on year, and now makes up 6% of total operating income.
Asset quality continues to improve, with the bank’s NPL ratio declining to 1.51% at the end of the third quarter, against 1.56% a year earlier.
Investors should continue to expect more of the same.
In a note dated November 15, BofA Securities tipped loan growth to accelerate in 2022, driven by demand in several key areas, including green finance, new infrastructure, rural development and advanced manufacturing.
China’s big banks are always politically on point, and it is surely no coincidence that those areas of production align with president Xi Jinping’s ‘common prosperity’ plans to reduce inequality, cut carbon emissions and upgrade Chinese industry. Total lending to green projects increased 30% year on year in the first nine months of 2021, to Rmb1.8 trillion.
CCB is well capitalized, with ample liquidity … but it would be wise not to rest on its laurels
Loan provisions were flat on an annualised basis in the first nine months, with non-loan provisions declining by Rmb10 billion. BofA tipped lower non-loan provisions to underpin stronger earnings growth in 2022.
CCB is well capitalized, with ample liquidity. It is implicitly supported by the state, and it has done a stellar job of keeping costs down over the last few years: the bank’s cost-to-income ratio stood at 25.7% at the end of September, versus 26.4% at the start of the year.
Its relatively low level of exposure to the country’s troubled property sector also counts in its favour. Real estate loans made up 4.4% of the lending mix at the end of June 2021, against 5.4% at Agricultural Bank of China and 5.5% at Bank of China.
In a November 12 research note, HSBC said it preferred CCB’s Shanghai A shares and Hong Kong H shares over the securities of any other big commercial state bank.
Risks
But CCB would be wise not to rest on its laurels. China’s economy is slowing. The year has been marked and marred by power cuts, industry crackdowns, and chaos at property firm Evergrande. Eye-watering debts accumulated by local governments and developers will stay a threat to financial stability.
Added to which, a host of sectors with strong links to state banks are under rising pressure going into 2022, including travel, restaurants, retail and power production.
Then there’s the potential for new bad loans to emerge as China adapts to a ‘new normal’, with state banks expected to lend more to innovative companies typically with greener and cleaner supply chains but shorter trading histories.
That future-NPL concern, Moody’s Investors Service said in a credit opinion published October 28, will remain “a risk to CCB’s asset quality”.
