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Agricultural Bank of China

China’s Big 4 banks may post a bad interim from this week, as bad loans rise amid a slower economy

Bank of China likely to lead declines; analysts see bad loans to persist for the remainder of 2016

PUBLISHED : Thursday, 25 August, 2016, 1:56pm
UPDATED : Thursday, 25 August, 2016, 1:56pm

China’s four biggest banks are likely to report a bad interim when they post their financial results for the six months ended June starting this week, as rising bad loans force them to set aside provisions, while a shrinking economy crimps demand for lending.

Declines are likely to be led by Bank of China, the country’s oldest lender, with a 4.2 per cent drop in first-half profit to 89.6 billion yuan (HK$89.6 billion), according to estimates by CLSA. The Beijing-based bank is scheduled to report earnings on Tuesday.

Agricultural Bank of China, operator of the biggest banking network in the country, may post a 1.1 per cent decline in net income to 104.14 billion yuan , according to the average of three analysts polled by the South China Morning Post. Agricultural Bank is scheduled to report results on Friday.

“Net profit will keep on averaging on zero growth,” said DBS Vickers’ research director Shujin Chen. “The second quarter will basically will be flat, after the 3.2 per cent growth in the first half. I expect the profit growth at the big four banks will range between zero to just 1 per cent.”

Industrial & Commercial Bank of China, the country’s largest lender, is likely to report 148.7 billion yuan in first-half net income, a slight decline from last year, when it announces results next Tuesday.

China Construction Bank, which reports second-quarter results on Thursday, is likely to say that its first-half net income dipped to 130.83 billion yuan.

The four state-owned banks are obliged to respond to government policy to keep lending to small and so-called micro businesses, regardless of their creditworthiness, putting their own balance sheets at risk, some analysts said.

“Banks will feel compelled to extend credit even if the underwriting criteria aren’t met and their ability to properly recognise bad debt in relation to SMEs may be constrained,” said CLSA’s head of China financial research Patricia Cheng in Hong Kong. “This is detrimental to the real asset quality.”

China’s non-performing loans have ballooned in a span of three years, as a government stimulus package in 2009 to bolster the economy led to a lending binge.

Bad loans stood at 1.4 trillion yuan, or 1.75 per cent of total lending, from 400 billion yuan, or 0.5 per cent, according to data by the China Banking Regulatory Commission.

Some banks have been restructuring their short-term loans into longer term obligations for borrowers, masking the true extent of the financial industry’s non-performing assets, said DBS Vickers’ Chen.

“I am most concerned about the NPL formation rate,” she said. “Some leading corporates will not even be put into the NPL basket.”

Dongbei Special Steel Group is a case in point. The state-owned producer of steel alloys used for aviation and nuclear power plants owes more than 8 billion yuan in loans and defaulted on six bonds this year.

“People are allocating even more funding into big state-owned enterprises,” Chen said.

China’s bad loans may worsen to 2.5 per cent of total lending at the end of 2017, from the current 1.75 per cent reported in the Chinese bank regulator’s data, Chen said.

The rising spate of bad loans has sucked up funds as provisions, leaving them with little room for manoeuvre with their balance sheets, said Daiwa Capital Market’s head of Greater China financials research Leon Qi.

“With the excess bad debt coverage provisions having almost run out in the first half this year, banks have now lost the flexibility to balance their bottom line growth and provisions,” Qi said. “Bottom-line growth will come under heavier pressure than in the second half of last year.”