Bank of China third quarter profit up 2.4 percent as margins shrink, NPLs rise

Bank of China Ltd (BoC), the country's fourth-biggest lender by assets, reported a 2.4 percent rise in third-quarter net profit on Wednesday, even as margins shrank and bad loans rose. State-owned BoC's results, the first among China's biggest banks to report third-quarter earnings, show that a pile-up of bad debts amid a slowdown in the world's second-largest economy continued to weigh on lenders' profits by forcing ever bigger write-offs.
Chinese banks, among the world's largest by market value, are facing increasing pressure to write off rising bad debts at a quicker pace, while a series of rate cuts last year eroded their interest margins and incomes. Profit for the June to September period was 41.8 billion yuan ($6.18 billion) compared with 40.8 billion yuan in the same period a year earlier. The result beat the 2.1 percent average profit growth estimate of three analysts, according to data compiled by Reuters.
The compression in net interest margin, the difference between interest earned on loans and that paid out to depositors, continued in the third quarter, falling to 1.85 percent from 1.90 percent at end-June. Its non-performing loan (NPL) ratio rose only slightly to 1.48 percent at end-September from 1.47 percent three months ago. NPLs totalled 146 billion yuan by the end of June, up slightly from 143 billion yuan at end-June.
But analysts believe that NPLs are being under-reported.
"We believe the loans allocation involves inappropriate judgements of professionals, more loans currently in the 'pass' and 'special mention' categories are expected to be reallocated to be the NPL in the future," said an October research note from CMB International on BoC.
Special mention loans, or credit that may sour quickly, rose to 3.32 trillion yuan by the end of June, pushing the total amount of questionable commercial loans to 4.76 trillion yuan at end-June, the CBRC data showed. Debt has emerged as one of China's biggest challenges, with the country's outstanding debt load reaching 255 percent of gross domestic product (GDP) in 2015. Excessive credit growth is signalling an increasing risk of a banking crisis in the next three years, the Bank of International Settlements (BIS) warned last month.
The total volume of NPLs at Chinese commercial lenders hit 1.44 trillion yuan at the end of the second quarter, the highest since 2005. Big lenders are seeing their loan provision coverage ratio, which measures the amount of funds set aside to cover potential bad loan losses, approaching the regulatory bottom line of 150 percent. BoC's ratio of allowance for loan impairment losses to non-performing loans remained nearly flat at 155.8 percent at end-September.
The other big banks - Industrial and Commercial Bank of China (ICBC) , China Construction Bank (CCB) , Agricultural Bank of China (AgBank) and Bank of Communications (BoCom) - are due to report their third-quarter results later this week. BoC's Shanghai-listed shares closed down 0.87 percent ahead of the results announcement, compared with a 0.35 percent fall in the benchmark Shanghai Shenzhen CSI 300 index.