Chinese lenders face loan pressure
Bad loans are expected to batter mainland bank profits in the third quarter, with rising overdue debt likely to force lenders to accelerate capital-raising plans.
The bad news on earnings comes at a time when investors are growing increasingly nervous about the outlook for the sector.
Nine Hong Kong-listed mainland banks, which will start to report interim results from this weekend, are likely to post about 10 per cent growth in earnings for the quarter, down from the average 13 per cent in the first half.
Companies in the world's second-largest economy are struggling to get to the end of the worst periods of growth since the 2008 global financial crisis.
The broad economic slowdown and weak external demand have seen overdue debts stack up on banks' loan books. That has forced them to repeatedly roll over bad debt, starving them of fresh capital to make new loans on more profitable businesses.
"We lower our profit forecast by 0.3 per cent for this year and 2 per cent for next year to reflect a lower net interest margin and higher credit cost assumptions," said May Yan, an analyst at Barclays Capital.
The People's Bank of China estimates the five largest mainland banks need to raise 40.5 billion yuan (HK$51.6 billion) of fresh capital over the next 12 months. In the third quarter, mainland banks announced plans to raise more than 163 billion yuan to replenish capital.
But with third-quarter earnings set to show a fall in momentum and more signs of deteriorating credit quality, the pressure to raise fresh funds is growing.
Yan said China Minsheng Banking would still face capital pressure in the long term, while the short-term pressure had been mitigated by the 20 billion yuan convertible bond issue in April and the looser-than-expected regulator timetable for new capital implementation.
The bank's tier-one capital was likely to have dropped to 7.9 per cent last month from 8 per cent in June, with non-performing loans estimated to rise 37 per cent this year and surge 69 per cent next year, Barclays said.
Bad loans from sectors hit by overcapacity and small exporters are expected to weigh on lenders' earnings outlook. Their shares will also be under pressure if an audit by the National Audit Office finds that the outstanding loans at local government financing vehicles, a major receiver of bank loans after the global financial crisis, surged from 9.7 trillion yuan at the end of June.
The office is expected to release the results in the coming weeks, and anticipation is high that the finances of local governments will have deteriorated.
Analysts at Jefferies estimate the average non-performing loan (NPL) ratio climbed seven basis points to 0.97 per cent last month, with the balance up 11 per cent over the quarter.
Citi analyst Simon Ho said the deterioration in NPLs "is expected to be an ongoing theme in the third quarter".