Big Four mainland China banks see profit growth slowing

Mainland lenders are expected to report an 11pc gain in profits for last year amid shrinking margins and surging bad-loan write-offs

PUBLISHED : Monday, 24 March, 2014, 4:45am
UPDATED : Wednesday, 20 June, 2018, 3:12pm

The mainland's four biggest banks are expected to report the slowest profit growth for last year since the global financial crisis in 2008 amid shrinking margins and surging bad-loan write-offs.

The Big Four - Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China - are expected to report 11 per cent growth in net income year on year to a combined 796.9 billion yuan (HK$1 trillion), a poll of eight analysts conducted by the South China Morning Post found.

Mainland banks will begin reporting full-year results this week, starting with BOC on Wednesday.

The analysts estimated the Big Four would be able to mitigate an increase in their non-performing-loan ratios and maintain them at an average of 1.05 per cent for last year.

But that was going to be achieved by erasing the worst of the bad debts off their balance sheets through selling part of their loan portfolios to asset management firms or eating into reserve provisions, the analysts said.

"The key is to look below the surface at how much NPLs are being written off and disposed of and how much provision coverage has slipped," Citi analyst Simon Ho said.

The four lenders were expected to have set aside a combined 157.1 billion yuan as loan-loss reserves to offset bad debt last year, compared with 147.4 billion yuan a year earlier, the poll found.

The market has been expecting an average of 35 per cent payout ratio
Grace Wu, Daiwa Securities analyst

Yet despite the massive reserves, the average bad-loan coverage ratio, which measures banks' ability to cope with bad debt, was expected to decline to 242 per cent from 280 per cent for the Big Four as such loans grew at a faster pace than the banks' provisions, the analysts said.

Another key thing to watch was whether there would be a change in their payout ratio, analysts said.

"The market has been expecting an average of 35 per cent payout ratio, so any level below that will be a downside surprise to the market," said Grace Wu, an analyst with Daiwa Securities.

Analysts are expecting an even worse year for mainland banks this year as Beijing may end its decades of control over deposit rates, meaning they will have to compete for deposits with a market-based rate, which is likely to be higher than existing levels, to attract customers.

Barclays analyst May Yan expects the net interest margin of mainland banks, a measure of the profitability of their lending business, to fall 10 basis points this year, sharper than an estimate of a decline of five basis points for last year.