Mandated property lending poses challenges for Agricultural Bank of China

ABC also faces a moderate decline in profits following recent rate cuts.

Chinese authorities’ mandate directing local megabanks and larger joint stock companies to inject liquidity into the real estate sector will pose additional risks to the Agricultural Bank of China’s (ABC) asset quality.

In a report, S&P Global Ratings warned that the mandated lending to the sector– which included property development projects under a so-called "white list"– will pose additional risks to ABC.

Separately, ABC faces a moderate decline in profits over the next two years following the central bank’s recent rate cuts.

The central bank's 25 basis point (bps) cut in the five-year loan prime rate benchmark in February 2024 is expected to lower ABC's NIM when the bank reprices loans.

The government has further mandated the restructuring of lending to local government financing vehicles (LGFVs), and this will also dent income.

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Overall, though, operating performance should be able to withstand the subdued economic recovery of China, S&P said.

“In our view, the bank will continue to benefit from its established franchise, and strong funding and liquidity,” the ratings agency said in a non-ratings commentary on the bank.

ABC is further expected to maintain fast loan growth in part due to its important policy role in the economy as one of China’s four largest banks.

“Emerging industries (such as those related to science and technology), green credit, inclusive finance, and manufacturing will remain key to lending growth,” S&P said.