By Patturaja Murugaboopathy and Gaurav Dogra
(Reuters) - Earnings of Chinese banks in the third quarter slipped by a smaller margin than in the prior quarter, signalling a potential turnaround for a sector whose valuations are near five-year lows.
An analysis of 24 major Chinese banks by market capitalisation showed that combined profit fell just 4.8% in the third quarter, compared with a 24% slump in the prior quarter.
Earnings were bolstered by a surge in loan growth and smaller provisions for loan losses, the data showed.
For a graphic on Chinese banks' net income growth:
https://fingfx.thomsonreuters.com/gfx/mkt/qmyvmxroypr/Chinese%20banks'%20net%20income%20growth.jpg
For a graphic on Chinese commercial banks' outstanding loan growth:
https://fingfx.thomsonreuters.com/gfx/mkt/yzdpxkeobvx/Chinese%20commercial%20banks'%20outstanding%20loan%20growth.jpg
"Chinese banks are showing the first signs of recovery after taking a big hit from the coronavirus pandemic," Alicia Garcia Herrero, a chief economist at Natixis said in a report.
The banks were supported by faster asset growth, which surged to 11% in Q3 2020 from 8.1% in 2019, she said.
"Although the monetary stance has turned prudent from June 2020, loans are still growing faster than in 2019," she said.
Data from the China Banking Regulatory Commission showed that loan loss provision ratio of commercial banks fell to 3.53% in the third quarter, slightly less than in the prior quarter.
For a graphic on Chinese commercial banks' loan loss provision ratio:
https://fingfx.thomsonreuters.com/gfx/mkt/bdwvklmrqpm/Chinese%20commercial%20banks'%20loan%20loss%20provision%20ratio.jpg
Shen Juan, an analyst at Huatai Securities, expects the net profit of listed banks to grow 7.1% year-on-year in 2021, as policy support for smaller firms, private enterprises and the infrastructure sector boost lending.
Shares of Chinese banks have slumped about 7% this year, versus the overall market's 25% gain.
Refinitiv data show the forward 12-month price-to-earnings ratio of the MSCI China Bank index at 4.67 by the end of last month, slightly above 4.4 in September – the lowest in nearly five years.
For a graphic on Chinese banks' forward 12 month PE ratio:
https://fingfx.thomsonreuters.com/gfx/mkt/oakvexlazpr/Chinese%20banks'%20forward%2012%20month%20PE%20ratio.jpg
The banking sector's valuation may be boosted as regulators hasten the opening-up of the capital market and investment flows into mainland shares increase, said Huatai's Shen.
However, the sector still faces a few challenges in terms of margins and asset quality, analysts say.
China's interest rates, indicated by Shanghai Interbank Offered Rate, have climbed this year.
However, the bank prime loan rate rate has not moved much, implying pressure on interest margins. Banks use prime loan rates as a benchmark to determine lending rates.
A spurt of missed debt payments by three Chinese state-owned firms has also shaken the credit markets, fanning some fears that banks have to set aside more money as provisions for loan losses.
For a graphic on Chinese commercial banks' net interest margin:
https://fingfx.thomsonreuters.com/gfx/mkt/qzjpqolkmpx/Chinese%20commercial%20banks'%20net%20interest%20margin.jpg
For a graphic on Chinese large banks' non-performing loan balance:
https://fingfx.thomsonreuters.com/gfx/mkt/dgkplaegzvb/Chinese%20large%20banks'%20non-performing%20loan%20balance.jpg