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China banks 2015 profits were pressured by tighter margins, worsening asset values

Profit growth at major Chinese banks is being hindered by slowing growth in the world’s second-largest economy, tighter margins and deteriorating asset values

PUBLISHED : Monday, 28 March, 2016, 2:06pm
UPDATED : Monday, 28 March, 2016, 4:05pm

Major Chinese banks’ results for 2015 should this week show continued subdued earnings growth as margins were squeezed and asset values deteriorated at a time when growth in the world’s second-largest economy hit the slowest pace in 25 years, analysts said.

“We expect the big four state-owned banks to see flat profits growth and small banks low single-digit growth,” said Lisa Feng, an analyst with Soochow Securities. “We do not expect much surprise as the China Banking Regulatory Commission (CBRC) has released key financial data for commercial banks and a few small banks have pre-announced the 2015 data.”

China’s top banking watchdog has said banking-sector profits grew 2.43 per cent in 2015, compared with 9.65 per cent in 2014. The non-performing loan (NPL) ratio by the end of the forth quarter was 1.67 per cent, compared with 1.25 per cent at end-2014.

China’s GDP growth for 2015 came in at a 25-year low of 6.9 per cent amid a gloomy outlook even as Beijing pushes to fix structural problems that have hindered the country’s economy. Last year’s gross domestic product growth was the lowest in a quarter of a century, according to data from the National Bureau of Statistics in January.

Chinese authorities have tried to tackle high debt ratios at both corporate and local-government levels, though the measures are unlikely to boost banks’ earnings outlook in the short term. Moreover, an easing monetary cycle to cushion the slowing economy will further squeeze ’ margins and may amplify structural problems, Feng said.

We expect the big four state-owned banks to see flat profits growth and small banks low single-digit growth
Lisa Feng, Soochow Securities

Pre-announced 2015 net profits at some banks, including China Merchants, Citic , Minsheng and Industrial Bank showed growth of 1 to 7 per cent, JP Morgan analysts led by Katherine Lei said in a note last week . That implied the big four banks’ growth was lower than the wider sector’s 2 per cent, they said.

The JP Morgan analysts expected 2016 to be another year of low or flat growth, mainly due to re-pricing of loan books, market rates on investment books and slower increases in fees as wealth management product sales falter.

They said Agricultural Bank of China and Bank of China were expected to see no net-profit growth in 2015, while China Construction Bank and the Industrial and Commercial Bank of China were expected to post a 1 per cent earnings’ increase.

Last week, two regional joint-stake banks, Bank of Chongqing and Chongqing Rural Commercial Bank said net profit would rise 12.1 per cent and 5.8 per cent for 2015 respectively. The non-performing loan ratio rose in both banks, by 28 basis points to 0.97 per cent for BCQ, and by 20 basis points to 0.98 per cent for CQRCB.

Industry sources said the CBRC regulator was considering a reduction in the bad-debt coverage ratio, to free up lending capacity.

The JP Morgan analysts said they were not expecting much.

“Even if this happens, banks may increase their non-performing loan recognition, lower the coverage ratio but keep credit costs flat,” they said. Any move by the industry watchdog would increase transparency on asset quality and reduced risks on dividend yields, they added.

Media outlet Caixin said in a report that three of the big four state-owned banks — Agricultural, China Construction and the Bank of China — are likely to lower their provision ratio to 130 per cent. The Industrial and Commercial Bank of China, the world’s biggest by assets, is likely to lower the ratio to 140 per cent, as will the Bank of Communications, China Merchants Bank and Industrial Bank, Caixin said.

Others may still follow the stipulated bad debt provision ratio of more than 150 per cent.

“A (provision) relaxation would run counter to a need for conservative provisioning at a time when asset quality is deteriorating and the concerns around the true level of NPLs in the system,” ratings agency Fitch said in a note last week. “That said, such changes in regulations in isolation should not have major rating implications as our analysis takes into account factors and performance trends beyond reported profitability figures.”

JP Morgan analysts said they expected another year of low single-digit growth in 2016 for the banks they cover and an increase in non-performing loans.

“We expect the big four state-owned banks to see flat profits growth and small banks to see 5 per cent year-on-year profits growth,” they said.

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