Banks struggle to cope with state measures
Mainland banks, emerging from the financial crisis with the world's largest market capitalisations, assets and profits, are facing a choppy year ahead as they balance their interests against the needs of the government.
To buoy confidence, boost liquidity and stimulate the economy, the authorities cut interest rates five times since September last year and pushed banks to lend more.
But hit by the lower rates, net interest margins, which account for 70 to 90 per cent of operating income at the six Hong Kong-listed mainland banks, dropped drastically in the first quarter, falling 13 per cent on average from a year ago.
As a whole, the six lenders' net earnings totalled 95.37 billion yuan (HK$108.32 billion) in the three months, down 9.46 per cent year on year. However, it was a remarkable 144 per cent improvement from the previous quarter, thanks to soaring loan growth, higher fee and commission income and diminishing investment losses.
Apart from overseas investments, which fell victim to the financial storm directly, loan growth and fee business were generally helped by domestic policies - a record 4.58 trillion yuan in new loans was extended in the quarter to serve the country's stimulus schemes and the sufficient banking liquidity boosted confidence in the stock market, which in turn contributed to banks' fee and commission income.
Few analysts are confident of forecasting the future performance of the sector, given the big uncertainties surrounding the world and mainland economy. Most expect the situation to stabilise.
'The outlook for the banks has improved. Non-performing loans are trending much better than expected, and we now appear to be past the worst of the net interest margin contraction cycle,' said Simon Ho, an analyst with Citigroup.
Bad debts have been a top concern of analysts since the credit expansion in the economic downturn started at the end of last year.
To their relief, top executives in many lenders have expressed similar concerns, indicating they are watchful of the risks.
All six banks have reported lower non-performing loan (NPL) ratios compared with the fourth quarter, as the boosted loans lifted the calculation base.
The lenders, except Bank of Communications and China Merchants Bank, had lower NPL balances.
'So far, about one-third of the new bank credit in the first quarter has been short-term commercial bills. As for the rest, the majority are medium and long-term loans that largely went to stimulus-related or other government-mandated infrastructure projects and investment,' said Wang Tao, a UBS economist.
The sound asset quality at the moment is because the loan quality problem will not blow up in the short term, and the more risky small and medium-sized enterprises and the export sector were largely ignored in the new financing.
Now the debate is focused on whether banks will keep the rapid credit growth later this year after the stimulus-related projects are snapped up. The central bank has hinted at no more credit tightening in the near term. If so, will banks turn to smaller companies, farmers and underdeveloped areas to lend generously as Beijing wants to see they are served to ensure employment and social security?
Ms Wang expects new loans to reach 7 trillion yuan this year, an increase of 23 per cent year on year. Although it will mean a big slowdown from the first quarter, the growth will still be striking and may support an economic recovery.
'The fast loan growth in the first quarter will turn into rapid fixed asset investment in coming months. When actual investment takes place, orders are expected to rise, and economic activity will rebound more visibly,' she said.
She forecast GDP growth to rebound to a quarter-on-quarter 14 per cent in the second quarter, creating a greater need for funding.
Analysts said the six banks, among the biggest in the country, were unlikely to be enlisted as the main force to serve small companies. The banking regulator announced on Friday it would ease requirements for smaller banks to open branches to better serve SMEs and clients in underdeveloped areas.
Fee and commission income was robust in most banks, with that of Industrial and Commercial Bank of China rising 44 per cent, Bank of China up 39 per cent and China Construction Bank Corp 33 per cent higher over the quarter.
Net earnings of the six Hong Kong-listed mainland banks fell a year-on-year: 9.46%