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Chinese language banks' income will weaken much more within the second half of 2020, says Fitch Scores

People wait outside a branch of the Bank of China in Beijing on July 11, 2014.

GREG BAKER | AFP | Getty Images

According to Fitch Ratings, banks in China are likely to see a larger decline in profits in the second half of the year as non-performing loans continue to rise as a result of the coronavirus pandemic.

From January to June of this year, Chinese banks' net profits fell 9.4% to around 1 trillion yuan (US $ 146.2 billion) compared to the first half of 2019 due to lower margins and higher expected credit losses, the rating agency said in a report from Wednesday with. The five Chinese megabanks saw profits drop at least 10% year over year – their largest drop in profits in at least a decade.

Chinese authorities attempted to sell 3.4 trillion yuan ($ 497 billion) of bad loans from the banking sector this year, Fitch said. Only around a third of that – or 1.1 trillion yuan ($ 160.8 billion) – was written off in the first half of 2020, the agency added.

China, the first country to be hit by the coronavirus, is among the earliest countries to see its economy recover. Many challenges remain, however, and pressures on Chinese banks' profitability could continue into next year, Fitch said.

Alongside the pandemic, Fitch cited ongoing US-China tensions as an uncertainty that weighed on the outlook in the Chinese banking sector.

"Despite the challenging outlook for profitability, we believe that Chinese banks will continue to pay dividends for 2020, which could limit their pace of growth," he added.

Chinese banks have been at the forefront of government efforts to manage the economic impact of the pandemic on households and businesses. Lenders in China – many of which are government controlled – have been asked by Beijing to sacrifice returns to help businesses by lowering lending rates and deferring loan repayments.

But Fitch has maintained its "stable" outlook for the operating environment for Chinese banks. It stated that by actively detecting and resolving non-performing loans, China's banking system can prevent credit risk from rising sharply.

Still, Chinese bank stocks continued to lag the broader mainland markets.

The FTSE China A 600 Banks Index, which tracks large and mid-cap banks listed on the mainland stock exchanges, has declined around 10.8% so far this year, while the broader FTSE China A 600 Index has declined over the same period Refinitive data increased by 17.1%.

Correction: This report has been updated to reflect that Chinese banks' net income has fallen 9.4% to around 1 trillion yuan ($ 146.2 billion). An earlier version incorrectly characterized the decline.

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