Chinese Banks Challenged as Economy Wobbles and Property Market Woes Mount

Chinese banks reporting earnings this week are wrestling with a range of operating challenges as the economy and the property market wobble.

(Bloomberg) — Chinese banks reporting earnings this week are wrestling with a range of operating challenges as the economy and the property market wobble.

China Construction Bank Corp., Bank of Communications Co. and China Merchants Bank Co. may face heavier provision burdens in the second half of 2023 and early 2024 after developer Country Garden Holdings Co. failed to pay dollar bonds on time. The banks also face scrutiny after embattled shadow bank Zhongrong International Trust Co. missed payments on dozens of products and planned to restructure debt.

The liquidity challenges underscore how property sector troubles and the weak economy are gripping the financial sector. Exposure to local government financing vehicles and a deflationary economy is compounding the pressure, Bloomberg Intelligence analyst Francis Chan said.

Chinese banks made a smaller-than-expected cut to their benchmark lending rate on Monday and avoided trimming the reference rate for mortgages. The central bank reiterated the need for boosting loans to support a recovery, adding to signs of heightened concern about the deteriorating economic outlook.

Baidu Inc. and NetEase Inc. also announce results this week, hot on the heels of Tencent Holdings Ltd.’s revenue miss that was seen as a bad omen for the tech industry. Shopping platform Meituan will report as China’s top leaders pledged to expand domestic consumption amid weak consumer sentiment.

Highlights to look out for:

Tuesday: Baidu’s (BIDU US) may post a strong recovery in advertising revenue, thanks to verticals with high offline exposure such as health care, tourism and local life services, according to UOB Kay Hian. Advertising revenue probably rose 12% to 20.4 billion yuan ($2.8 billion) in the second quarter, consensus shows. AI cloud revenue growth is set to slow to 3% in the second half of the year, and may be held back by delays in smart-transportation projects, Citi analysts said.

Live-streaming platform Kuaishou (1024 HK) may post its first quarterly net income since listing in 2021, estimates show. The firm forecast first-half net income of no less than 560 million yuan, up from a net loss of 9.43 billion yuan a year ago. Its long-term momentum may be slowed by competition in the sector with Tencent’s entry, according to BI. Macroeconomic uncertainty may be a headwind for its advertising and live-streaming business through the rest of the year, BI added.
Woodside Energy’s (WDS AU) earnings probably fell in the first half as a global inventory buildup of liquefied natural gas came to an end, pressuring gas prices, BI said. Workers at Chevron and Woodside facilities in Australia voted to approve industrial action at the North West Shelf, Wheatstone and Gorgon operations, which may disrupt about 10% of global exports of the fuel. The firm earlier expected a $630 million expense related to its Pluto facility, denting first-half net income. The company plans to sell a 10% non-operating participating interest in its Scarborough LNG project in Australia for $500 million.

Wednesday: China Construction Bank (939 HK) may experience sluggish earnings growth this year as an aggressive loan push might be offset by a margin plunge. BI analyst Francis Chan expects a net interest margin dip of more than 20 basis points this year after a sharp decline in the first quarter, while revenue might grow at a low single-digit percentage rate. Loan risks from the property sector and local government financing vehicles might also hurt credit-cost performance, he added.

Thursday: Meituan (3690 HK) is set to expand its adjusted Ebitda margin this year as it improves operating efficiencies of initiatives including grocery retailing, group buying and ride sharing, BI analysts Catherine Lim and Trini Tan said. These plans will reduce additional spending on user incentives and spur revenue growth. Expanding service categories and improving merchant technology may boost long-term sales and earnings, they added. Total revenue will probably rise 32% to 67.2 billion yuan this quarter, consensus shows.

Gaming giant NetEase’s (NTES US) revenue may grow in the second quarter from a year earlier — though slow sequentially — with recovery seen in its online dictionaries and courses provider Youdao, estimates show. Strong early showings by the Justice and Racing Master games could put it on a solid footing for the rest of the year, BI said. With China’s consumer spending slowing and unemployment rising last month, overseas expansion is essential for long-term growth. The company, along with Tencent, faces a tightening regulatory environment amid rising geopolitical tensions. Management aims to expand overseas game sales to 50% of overall gaming revenue from the current 10%, BI said.
Qantas Airways’ (QAN AU) full-year revenue probably more than doubled, estimates show, driven by the post-pandemic travel boom. In May, the airline forecast record pretax income of A$2.43 billion to A$2.48 billion ($1.6 billion) for the year ending June 30. Its international capacity recovery may accelerate beyond the currently planned 85% of 2019 levels as markets in China and Asia gradually recover in the first half of fiscal 2024, BI analysts Tim Bacchus and Eric Zhu said. Strategic business plans under the new management team will also be watched closely.

Friday: Bank of Communications (3328 HK) and China Merchants Bank (3968 HK) probably saw growing pressure on net interest margins as market sentiment on Chinese banks remain muted, Morningstar analyst Iris Tan said. CMB’S NIM may drop to 2.2% to 2.3% as asset yields fall sharply to reflect a reduced loan prime rate and Beijing’s push for lower rates on existing home loans, according to BI.

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–With assistance from Ryotaro Nakamaru.

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