The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Robyn Mak

HONG KONG, March 5 (Reuters Breakingviews) - China's lenders are stuck between a rock and a hard place. Earnings are under pressure, but the government wants them to step up lending and drive growth. The dilemma is most stark at the $70 billion Bank of Communications 601328.SS,3328.HK.

Beijing on Wednesday unveiled plans to deploy 500 billion yuan ($68.8 billion) of special debt funds to recapitalise its major state banks. Officials gave no further information, but BoCom will be among the first batch for the capital injection, Bloomberg reported last week, citing sources. Analysts at JPMorgan reckon 150 billion yuan could go to the HSBC-backed lender. That could lift its common equity Tier 1 ratio to 11.8%, from 10.3% as of the third quarter of 2024.

BoCom is the weakest of the country's big five global systemically important banks. The lender sports the lowest capital buffer over the regulatory minimum. Its return on average equity is set to fall to 7.3% this year, below its peers, according to forecasts gathered by Visible Alpha. Even after rallying some 30% over the past 12 months, its Hong Kong stock trades at just 0.4 times forward book value, per LSEG, trailing other lenders.

Much like its rivals, BoCom is struggling with an earnings crisis as sluggish loan demand and interest rate cuts squeeze margins. But its funding costs are higher than peers, due to a smaller and less geographically diverse network of retail branches. Meanwhile, risks are piling up at BoCom's once-booming credit card business, with overdue loans hitting 5.71% of the unit's portfolio as of the end of September; the bank's overall ratio is 1.39%.

A recapitalisation would, on paper, put BoCom on stronger footing to help support Beijing's "around 5%" GDP growth target amid escalating U.S. trade tariffs. The Shanghai-based bank boasts an enviable foothold in the Yangtze River Delta, where top industries including electric vehicles contribute an estimated 25% of economic output.

But a capital injection will only deliver a short reprieve to the firm and its rivals as their earnings further deteriorate. Economists expect the central bank to further cut policy rates this year, by as much as 40 basis points - the most aggressive annual reduction in a decade, per Reuters. And with the lenders expected to maintain dividend payouts at 30% of earnings, that's hardly an incentive to lend more. Analysts at S&P Global Ratings forecast BoCom will grow its loan book by 7% to 7.5% annually between 2024 to 2026, down from 9% to 11% in 2022 to 2023. With such pressures building, the bank would be better off keeping any new powder dry.

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CONTEXT NEWS

China will recapitalise its major state banks with 500 billion yuan ($68.8 billion) raised from selling special treasury bonds, according to a government document prepared for the annual meeting of the National People's Congress (NPC), China's parliament, released on March 5.

Bloomberg on February 26 reported that Agricultural Bank of China, Bank of Communications and Postal Savings Bank of China will be the first batch of banks for a capital injection of at least 400 billion yuan, citing sources. The plan could be completed as soon as the end of June, the report added.

In total, China could inject as much as 1 trillion yuan of capital into its largest banks, with funding mainly from the issuance of new special sovereign debt, Bloomberg reported last year.

(Editing by Antony Currie and Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on MAK/ robyn.mak@thomsonreuters.com))