Bank of China, the country's No 4 lender, posted a 5.1 percent rise in second-quarter net profit on Thursday, its slowest profit growth in over 3 years as China's banks face up to a more competitive market place. April-June net profit of 34.84 billion yuan was broadly in line with expectations and was calculated from the company's figures after it published a 7.7 percent rise in first-half net profit to 71.6 billion yuan.
The anaemic growth sets a weak tone for other banks in the so-called "Big Four" - Industrial and Commercial Bank of China, China Construction Bank (CCB), Agricultural Bank of China Ltd (AgBank) - which are due to report through to August 30. "Almost everything slowed if you're looking on a quarter-to-quarter basis," said Bill Stacey, an analyst at Keefe, Bruyette & Woods in Hong Kong.
Second-quarter net profits were lower than first-quarter earnings. Fee and commission income fell 39 percent to 13 billion yuan from 21.2 billion yuan in the first quarter. "The one encouraging thing is that they managed to keep their net interest margins stable," Stacey said. The bank's net interest margin was 2.1 percent at the end of June compared with 2.11 percent at the end of March.
Figures on bad debts were also encouraging, analysts said. BoC's total loans grew about 6.5 percent in the first half of the year, but the bank increased provisions by a more modest 5.8 percent. Non-performing loans fell to 0.94 percent as of the end of June from 0.97 percent at the end of March, the bank said.
"It shows they are extremely confident about their asset quality in the future," said Sheng Nan, director for China bank research at CCB International in Hong Kong. "Typically, lower provisions means they feel like non-performing loans will fall." BoC released its results after the close of trading on the Hong Kong stock exchange. Its shares rose 1.4 percent on the day, taking gains so far this year to 4.5 percent.
Analysts said weak economic expansion, a slowdown in deposits growth and a more competitive interest rate market would weigh on results in the future. ICBC, the world's biggest bank by market capitalisation, is expected to say first-half net profit rose 15 percent from a year earlier, a Reuters survey of nine analysts shows. But that would be almost half the pace it reported for the first half of 2011.
The slowdown in profits growth is expected to be more pronounced in the second-quarter, when analysts estimate net profit rose 9.5 percent, or 60.98 billion yuan. CCB and AgBank are expected to report second-quarter net profit growth of 11 percent and 19 percent, respectively. A seemingly endless flow of deposits insulated China's major banks from poor lending decisions in recent years. They could rely on government-set fixed net interest margins and a steady economic growth rate of at least 10 percent.
But the banking landscape is changing. Deposit growth has slowed down, partly because of outflows to investment products that offer higher returns. Since the start of 2011, banks have suffered net monthly declines in yuan deposits five times, compared with just once between 2002 and 2010.
This year the central bank raised the competitive stakes by giving banks more leeway to set their own deposit and lending rates. Commercial banks can now set deposit rates at up to 1.2 times the benchmark central bank rate. "Margins will likely fall more in the second half of this year, partly because of the interest rate liberalisation we're seeing," said Tan Yuansheng, president of Chongqing Rural Commercial Bank, which reported a 25 percent jump in its first-half earnings on August 17.
The net interest spread has tightened to just 0.9 percent, based on the lowest permissible lending rates and highest permissible deposit rates, from more than 3 percent as recently as June. Economic growth is seen sliding this year to around 8 percent, its worst showing since 1999, feeding expectations of a rise in bad loans, currently running at less than 1 percent. Some sectors are already feeling the pinch.
More than 20 steel traders have been taken to court by lenders such as China Minsheng Bank over debt defaults in the past two months. Such court action has been rare in China. The hangover from the lending spree sparked by China's 4 trillion stimulus package during the global financial crisis in 2008-2009 is also now weighing.
Bad loans are now likely to rise to about 3-5 percent as some of those loans come due, Gigi Chan, who manages the China Opportunities Fund at Threadneedle, said before BoC released its results. "You just don't see so many roads to nowhere anymore," she said.
Comments
Comments are closed.