Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

China banks set for modest profit growth as bad loan outlook under cloud

Published 21/08/2018, 00:03
Updated 21/08/2018, 00:10
© Reuters. FILE PHOTO: Industrial and Commercial Bank of China Ltd (ICBC) at its headquarters in Beijing

© Reuters. FILE PHOTO: Industrial and Commercial Bank of China Ltd (ICBC) at its headquarters in Beijing

By Engen Tham and Sumeet Chatterjee

SHANGHAI/HONG KONG (Reuters) - China's biggest listed state-owned lenders are expected to post modestly higher profits and steady margins for the six months ended June, as government efforts to boost spending and liquidity underpins loan growth.

Beijing has been pumping funds into the banking system and rolling out support measures for local businesses to cushion the impact from an escalating trade war with the United States. The two countries implemented tariffs on $34 billion worth of each others' goods in July.

But analysts fear an unrestrained, credit-fuelled growth, could worsen a build-up in bad loans, already at nine-year highs, as the world's No.2 economy cools, undermining Beijing's push to reduce riskier lending and a mountain of debt.

Indications on future trends are expected to emerge over the coming weeks as the country's top banks - Industrial and Commercial Bank of China (SS:601398), China Construction Bank Corp (SS:601939), Agricultural Bank of China (SS:601288), Bank of China (SS:601988) and Bank of Communications Co Ltd (SS:601328) - unveil their January-June results.

Profits for China's top five banks are expected to have risen by 4.7-7 percent, said analysts surveyed by Thomson Reuters. In 2017, the banks saw profits rise 2.8-4.9 percent.

Due to better loan margins, "I expect no major changes either up or down, so stable earnings situation", said Nicholas Zhu, a Moody's banks analyst, referring to the top-tier banks.

Their results will also be underpinned by the diversity "in their asset base source of income", he added.

For smaller lenders, however, the story is different as they are being hit harder by Beijing's crackdown on risk in the broader financial system.

BAD LOANS SPIKE

By the end of the June quarter, the non-performing loan ratio for the banking sector reached 1.86 percent, data from the China Insurance and Banking Regulatory Commission shows.

This was the highest since 2009.

Bad loans spiked 183 billion yuan ($26.62 billion), the biggest quarterly jump since the regulator began publishing data in 2003.

"The market expects a deterioration in quality of assets in the banking sector because of the slowing down of the economy," said Steven Leung, Hong Kong-based sales director, UOB Kay Hian.

The weaker yuan , which has fallen for 10 weeks, is also likely to drag on lenders' offshore loan portfolios, said Leung, who has a "buy" rating on the top banks because of low valuations and high dividend yield.

Small banks, hurt by Beijing's move to cut excess industrial capacity and curb pollution, are seeing a spike in bad loans, with some reporting zero or negative capital adequacy ratios.

New asset management rules due to come into play in the middle of next year have already squeezed smaller banks, which depend to a greater extent on income from the sales of wealth management products, analysts said.

SILVER LINING

The situation could get more complicated in the event of an economic slowdown and a surge in corporate defaults.

So far, official data shows limited impact from the U.S-China trade spat, but some economists are trimming China growth estimates saying tougher tariffs will bite.

China's Politburo, the Communist Party's top decision-making body, said last month it would achieve this year's GDP growth target of around 6.5 percent, despite mounting risks. The economy expanded 6.9 percent in 2017.

Beijing's recent easing, ranging from encouraging banks to raise investment in bonds of corporates and other entities to allowing greater access to Medium Term Loan Facilities, should be a silver lining for smaller lenders.

"Since the main source of debt for the four major banks is deposits, the relative benefit (of Beijing's easing) is less than for small and medium-sized banks," said Duan Taotao, a banks analyst at Industrial Securities.

© Reuters. FILE PHOTO: Industrial and Commercial Bank of China Ltd (ICBC) at its headquarters in Beijing

($1 = 6.8740 Chinese yuan)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.