Bank of China and Industrial and Commercial Bank of China completed a run of forecast-busting profit reports by the mainland's Big Four lenders yesterday, but both institutions signalled a risk of rising bad debts that investors worry are building across the banking system.
ICBC, the mainland's biggest bank by market capitalisation, said it made net profit of 69.6 billion yuan (HK$87.6 billion) in the second quarter, up 12.5 per cent on the same period last year, while BOC - the country's No 4 lender - said net profit in the quarter was 40.9 billion yuan, a rise of 17 per cent year on year.
Both numbers were comfortably ahead of analyst forecasts and nestled neatly between the 22 per cent increase in net income reported by Agricultural Bank of China and the 9.7 per cent profit growth by China Construction Bank in second-quarter earnings statements this week.
"Mainland banks generally delivered better-than-expected results for the first half, showing their resilience amid the economic slowdown," said an analyst with a Beijing-based investment bank who declined to be named, citing company policy.
"However, they are set to face headwinds from the continuing economic deceleration in the second half, which will see formation of more soured loans from local government financial vehicles, among other sectors."
ICBC said it had made 9.8 billion yuan worth of provisions for bad debts in the quarter, up from 9.1 billion yuan in the same period last year. BOC's 14.1 billion yuan of provisions were 276 per cent greater than those made a year earlier.
BOC president Li Lihui told reporters in Hong Kong: "In the second half, it's likely net interest margin will be unchanged from the 2.23 per cent in the first half or slightly narrower, impacted by the progressing interest rate deregulation, but we have confidence in asset quality due to our intensified risk controls."
Overdue loans at ICBC not yet designated as non-performing loans rose to 69.2 billion yuan, or 0.73 per cent of all lending, from 0.71 per cent at the end of last year.
ICBC president Yi Huiman said in Beijing: "Non-performing loans are still well managed, and we have made strong and solid allowance for them … We will be able to hold down our NPL ratio far below our annual target ratio."
The bank set a target of 1.2 per cent at the beginning of the year.
The risk of rising bad debts is stalking the financial system as the economy struggles to stabilise after lurching through a two-quarter slowdown that has left it on track for its slowest full year of growth in 23 years.
Firms are struggling to repay loans as foreign orders for the mainland's export-oriented manufacturers remain depressed by recessionary risks in the European Union - its biggest market - a tepid consumer recovery in the United States and rising competition from Japan after a plunge in the value of the yen made Japanese goods cheaper.
That has put banks on notice that they will need to raise capital to offset debt.
China Merchants Bank, the mainland's sixth-largest lender, has put itself at the front of the queue for capital. It won regulatory approval earlier this month to raise 35 billion yuan from shareholders in a stock offering that is likely to be the world's second-biggest this year.
Agricultural Bank confirmed yesterday that it is working on plans to raise capital by issuing preferred shares. News of the planned offer came during a briefing for analysts by the bank, a day after it posted results, Reuters reported.