Two of China's biggest banks post nearly flat profit growth
Flat results at ICBC and Agricultural Bank of China likely because of credit costs on loans and present gloomy outlook for the sector
Profit growth at two of China's biggest lenders slowed in the first half as the banking sector came under increasing pressure from a cooling economy.
At Industrial and Commercial Bank of China, the world's largest lender by assets, profits were up just 0.7 per cent year on year to 149.4 billion yuan. Profit growth at Agricultural Bank of China edged up 0.5 per cent to 104.3 billion yuan.
The results for both banks fell under the consensus of analysts as credit costs on loans ate away at the spoils.
Asset quality also showed significant deterioration, with Agricultural Bank's non-performing loan ratio hitting a sector-wide high at 1.83 per cent at the end of June. The average is 1.5 per cent.
The results from the two banks, the first of China's "big four" national commercial lenders to report interim earnings this year, presented a gloomy outlook for the sector in general. Bank of China and China Construction Bank are expected to deliver earnings for the first half on Friday.
The growth rates for the first half raised questions with analysts over whether full-year results at a major Chinese lenders could fall below those of 2014.
"I think [ICBC] will be able to post a full-year earnings figure that is slightly higher than last year but we are very close to flat already. It wouldn't take much to push it into negative territory, so it's definitely possible," said Matthew Smith, a senior analyst at Macquarie Securities in Shanghai.
During a conference call with journalists late on Thursday, ICBC's management said that the transformation of the Chinese economy towards slower growth and the process of deleveraging from bank credit was the main factor in slow growth.
"Banks have to pay a price in this process," bank president Yi Huiman said.
ICBC's non-performing loan ratio climbed 27 basis points in the six-month period to 1.4 per cent, higher than analysts' expectations. The bank's management said it would "feel growing pressure" in the second half of the year.
Net interest margin, a gauge of the profitability of lending, notched a large drop from the end of last year at ICBC. The bank's net interest margin fell to 2.53 per cent from 2.66 per cent at the end of last year.
Margins at banks in China have felt the pressure of five interest rate cuts over the past 10 months and the profitability of lending was expected to compress further in the second quarter. ICBC's management said the cuts had reduced net interest income by 27 billion yuan in the first half.
At Agricultural Bank, the balance sheet expanded at a worrying rate. Total assets hit 17.5 trillion yuan, from 16 trillion yuan at the end of 2014.
The People's Bank of China's drive to reduce financing costs and liberalise deposit rates have hurt the bank's net interest margins, which dropped 15 basis points to 2.78 per cent in the latest season.
The bank's total loan book is now at 8.46 trillion yuan. On average, average yield of the bank's loans is at 5.79 per cent.
Agricultural Bank said its average yield has been falling as it needs to reprice its existing loans and new loans on schedule, driven by market demand and after the four interest rate cuts by the PBOC since November 2014.
Meanwhile, its funding base has also been hit - average costs on its deposit funding base has risen 5 basis points. It is now paying some extra 1.6 trillion yuan to customers, up from the 1.4 trillion yuan a year ago.
Bank of Communications, China's fifth largest commercial lender, yesterday said profits for the second quarter hit 37.3 billion yuan, growing by about 1.5 per cent over the same period a year earlier.
Net interest margin fell during the first half of the year to 2.27 per cent from 2.39 per cent in December.
