Industrial Bank's Asset Quality Risks Persist

In recent years, the once coveted title of "King of Peers" held by Industrial Bank has gradually faded, leading to a lack of distinct characteristics that investors can readily identifyThis lack of unique features may indicate the bank is currently navigating a transformation phase.

As of the end of the third quarter, Industrial Bank reported total assets of 10.31 trillion yuan, reflecting a modest year-on-year growth of 1.47%. Although such growth is not particularly remarkable, achieving upward momentum becomes increasingly challenging as the asset base is already at a significant levelHere, it is essential to note that the bank's balance sheet appears relatively stable overall.

Examining the loan structure reveals that corporate lending dominates, constituting 59.78% of total loans by the end of the third quarter, a notable increase of 8.45% from the previous yearConversely, personal loans have decreased by 1.43% in the same timeframe.

The performance of demand deposits has shown considerable discrepancy compared to the interim report

By the end of the third quarter, demand deposits had declined by 2.79% year-on-year, whereas they had increased by 8.1% at the mid-year markThis signifies a substantial drop in demand deposits during the third quarterOn the other hand, time deposits, which had barely grown by 0.09% at the end of June, saw a more significant year-on-year increase of 7.47% by the end of September.

It is characteristic this year for deposits to shift from demand to timeIndustrial Bank has notably experienced a surge in time deposits during the third quarter, suggesting a strategic adjustment in response to market conditions.

The bank's performance has not been particularly remarkable eitherBy the end of the third quarter of 2024, Industrial Bank recorded an operating revenue of 164.217 billion yuan, indicating a year-on-year increase of 1.81%. However, net profit attributable to shareholders showed a decline of 3.02% year-on-year, falling to 63.006 billion yuan

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This is a significant shift from the first half of the year when the bank reported a slight increase in net profit.

Delving into the income structure, the bank achieved growth in net interest income for both the first half of the year and the first three quarters, which in turn bolstered total operating revenueIn the current environment of shrinking interest margins, any growth in this area is quite noteworthy.

On the contrary, non-interest income experienced a decline, with net income from fees and commissions dropping 15.16% year-on-year, a reduction that is 4.26 percentage points less severe compared to the halfway mark of the yearDuring the first half, net income from fees and commissions saw a drop of 19.42%, primarily influenced by a significant decrease in consulting service fees.

According to previous explanations provided by Industrial Bank regarding consulting fees, these largely encompass revenue from wealth management products, bond underwriting, and asset management advisory services

While specific income composition details are currently unavailable, it is plausible that the current bond underwriting market conditions are adversely impacting revenue from this segment.

The differences in performance between the third quarter and the first half also manifest in net profit figuresThe first half showed slight growth, whereas net profit by the end of the third quarter has declinedThe rising charge for credit impairment losses is a key contributor to the dip in net profit; for the first three quarters, credit impairment losses amounted to 47.7 billion yuan, an increase of approximately 6 billion yuan year-on-yearHowever, the provisioning coverage ratio decreased by 11.67 percentage points compared to the end of the previous year.

Notably, the trajectory of Industrial Bank's full-year net profit is uncertainShould the fourth quarter bring a reduction in credit impairment losses or an uptick in tax-exempt assets, net profit figures could potentially mirror those from the first half

It is vital to observe that credit impairment losses alongside the provisioning coverage ratio offer insights into the bank's asset quality and risk status.

The ongoing concerns regarding asset quality are palpableThe bank is still in the process of managing non-performing loansAt the end of September, the non-performing loan ratio stood at 1.08%, while the provisioning coverage ratio was a solid 233.54%. These figures reflect a favorable stance compared to many publicly listed banks, indicating that the overall asset quality is somewhat stable.

However, underlying problems suggest a potential deterioration of asset qualityAs noted, there are simultaneous increases in both the balance of non-performing loans, which reached 62.118 billion yuan—a rise of 3.627 billion yuan year-on-year—and the non-performing loan ratio, which climbed 0.01 percentage points from year-end figures.

Furthermore, the focus on watched loans rose to 1.77%, up 0.22 percentage points from the year-end, with a watched loan balance of 101.6 billion yuan, increasing by 17.2 billion yuan

This escalation is primarily attributed to the rising retail risksThe numbers also indicate a surge in substandard and doubtful loans, which suggests that provisioning losses may continue to mount.

The slight decline in personal loans may be reflective of the rising risks associated with individual credit products, though the third-quarter report does not provide specific breakdowns on this frontBased on mid-year findings, it’s plausible that risks in the credit card sector, which bore the highest delinquency rate (3.88%) among personal loans, could be driving this contractionThis contraction in personal lending may also be a consequence of reduced credit card offerings, as seen in the drop in the balance of credit card loans, which decreased by 1.35 percentage points year-on-year.

In the mid-year report, it was noted that the real estate sector was the bank’s third-largest loan sector, with an uptick in the delinquency rate for real estate and construction sector loans

By the end of June, the outstanding balance for real estate financing stood at 751.072 billion yuan, reflecting a year-on-year increase of 60.926 billion yuan and largely directed towards urban renewal, industrial parks, and housing leasing – emerging fields of investmentThe delinquency rate was recorded at 3.65%, an increase of 0.62 percentage points from the end of last year.

Industrial Bank has stated that the increases in delinquencies are a result of its robust risk assessment measures tied to a framework for coordinating real estate financingThis includes timely downgrades of risk classifications and adjustments to the provision for losses when certain ongoing projects are deemed unlikely to meet delivery expectations.

When considering the surge in restructured loans, which rose markedly from 30.93 billion yuan at the end of the previous year to 27.736 billion yuan by the mid-year mark, it raises the alarm about underlying asset quality concerns.

The growth in overdue loans, too, has proven alarming, with a reported overdue loan balance of 82.404 billion yuan at mid-year—an increase of 8.121 billion yuan year-on-year

The rise was observed across both corporate and personal overdue loans, emphasizing the pressing risks facedInterestingly, however, credit card overdue loans saw a reduction.

Geographically, while the Shanghai branch demonstrated growth in operating revenue, it also reported a staggering decline in total profits exceeding 30%. Notably, the non-performing loan ratio in Shanghai topped the bank’s regions at 1.96%. Alongside this, the Guangdong region recorded losses in operating profit—raising questions, particularly given the economic robustness generally associated with these regions.

The occurrence of these trends in highly developed economic areas like Shanghai and Guangdong invites closer scrutinyObservers will have to watch closely as Industrial Bank navigates its transformation phase amidst economic pressures and asset quality challenges, searching for a way forward that restores its reputation and economic potential.