Mainland banks are expected to unveil much slower profit growth when they begin reporting their first-half results in Hong Kong this week, but with earnings still growing at a double-digit pace, investors are likely to be forgiving.
The 16 mainland banks listed both on the mainland and Hong Kong bourses will post an average 16.1 per cent net profit increase from a year ago in the first half, with average earnings growth for the second quarter at 12.5 per cent, according to analysts at securities brokerage BOC International.
The net earnings growth would be a significant slowdown from the 34 per cent surge in the first half of last year, but will still provide a "positive surprise" to investors who have grown accustomed to bad news as the Chinese economy cools more than expected this year.
"Investors are over-pessimistic about banks' first-half results," China Investment Securities analyst Zhang Lei said. "The over 15 per cent net earnings increase and generally mild rise in non-performing loans will beat their expectations and may lead to a stock price rebound."
Bank shares are currently trading at prices near their net book values on the mainland and slightly higher in Hong Kong, as investors are worried about shrinking interest spreads resulting from the ongoing interest rate deregulation and rising bad loans from companies that are struggling with the economic downturn.
May Yan, an analyst at Barclays Securities, said: "China bank shares could be supported by their steady first-half results. However, a rebound on 'oversold' shares could be short-lived and capped by a middle-term overhang of further interest rate deregulation and a bad loan outlook." In an important initial step to liberalise interest rates in June, the People's Bank of China lowered its lending floor from 90 per cent of benchmark lending rates to 70 per cent and introduced a deposit rate ceiling at 1.1 times benchmark deposit rates. It is widely expected the liberalisation initiatives will intensify competition and squeeze banks' net interest margins (NIM), which has previously accounted for most of their profits.
For the nine Hong Kong-listed mainland banks, average first-half profits likely grew 18 per cent year-on-year, with net earnings growth slowing to 12 per cent in the April-to-June period, according to Barclays.
Average NIM for the nine banks probably dropped by three basis points from the first quarter to 2.86 per cent in the second quarter, mainly reflecting slackening loan demand as economic growth flagged, said May. The effects of two interest rate cuts since June, together with deregulatory steps, are expected to amplify from the second half of this year, and in 2013, NIM will probably fall 30 basis points from this year, she added.
The lenders' average non-performing loans (NPL) could rise slightly by 5 per cent in the second quarter from the first three months, reflecting increased debt defaults by struggling small- and medium-sized enterprises and private company operations. But since total lending was also up, the sector's NPL ratio would remain almost unchanged at 0.92 per cent, said May.
Huaxia Bank and Industrial Bank, the first lenders to announce results in Shanghai, said on Friday that first-half profits surged 42 per cent and 39.8 per cent, respectively, from a year ago.