Bank of Communications (BoCom) yesterday reported the slowest first-half earnings growth in two years due to the economic slowdown, and predicted a mild rise in non-performing loans in the second half.
The Shanghai-based lender, part owned by HSBC, posted net profits of 31.09 billion yuan (HK$38.03 billion) between January and June, up 17.8 per cent from a year earlier.
Interim earnings grew at the slowest pace since 2010, joining its bigger domestic rivals, which also reported a sharp decline in profit growth during the first half when the mainland's economy expanded 7.8 per cent, the slowest in three years.
"It will be increasingly difficult to chase rapid profit rises via higher interest income and fast loan growth," BoCom president Niu Ximing said.
"The bank is supposed to manage assets cautiously to avoid big risks and ensure earnings will increase."
Beijing has cut interest rates twice this year to combat the economic slowdown and the central bank also began liberalising the interest rate mechanism.
Both moves dented the net interest margins of the mainland lenders, which previously enjoyed a large difference between deposit and lending rates to rake in hefty interest income.
BoCom said its net interest margin grew 5 basis points to 2.61 per cent.
By comparison, the margin increased 11 basis points from a year earlier.
Net interest income in the first six months was valued at 58.39 billion yuan, also up 17.8 per cent year on year.
However, pressure on BoCom's interest income is set to increase in the second half because it has to offer higher deposit rates to attract depositors while lowering lending rates to extend more loans.
"Competition among Chinese banks is set to intensify," chief financial officer Yu Yali said. "The pressure to increase interest income is extremely high."
Mainland banks derive most of their profit from interest income.
BoCom said it would step up efforts to increase fee-based income.
Its Shanghai-listed A shares added 0.9 per cent to 4.39 yuan yesterday and its H shares dropped 3.5 per cent to HK$4.99.
BoCom reported that 887 million yuan of its loans soured in the first half.
The bank said 800 million yuan of the bad loans arose from lending in Wenzhou, Zhejiang province.
A credit crisis erupted in Wenzhou, dubbed the capital of mainland private businesses, last year amid the collapse of the illegal underground banking sector.
Yang Dongping, BoCom's chief risk management officer, said he expected the value of non-performing loans to keep growing but insisted the risks were "controllable".
"It's certain that bad loans will be on the rise," Orient Securities analyst Jin Lin said.
"But for BoCom, the problem won't largely affect its bottom line for this year."
BoCom reported a bad-loan ratio of 0.82 per cent at the end of June.
Mainland banks granted easy credit to state-owned businesses and local government financing vehicles to support the infrastructure-focused stimulus package in 2009-2010.
A large portion of the projects will not be able to generate enough cash to repay banks, resulting in soaring non-performing loans.