Hong Kong company reporting season

Chinese banks expected to see sluggish profit growth for 2016

Shrinking lending margins and slow progress in cleaning up bad loans erode the sector’s earnings but a manufacturing rebound helps brighten its prospect

PUBLISHED : Sunday, 05 March, 2017, 5:26pm
UPDATED : Sunday, 05 March, 2017, 9:35pm

China’s banking giants are expected to report sluggish growth in 2016 net profit later this month due to shrinking lending margins and slow progress in cleaning up bad loans, analysts say.

However, earnings might improve in the coming two years as a recovery in the industrial sector would help boost financing demand, they said.

Net profits at China’s listed lenders are expected to rise 2.3 per cent last year, accelerating from 1.8 per cent in 2015. But the five largest state-owned players were likely to see a meagre 1.2 per cent gain, a report by SWS Research said.

“A major narrowing in interest margins in early 2016 has eroded banks’ net interest income, which dragged down their earnings,” analyst Wang Congyun said. “We saw signs of stabilising in the second half of the year.”

Net interest margins at banks have shrunk after the People’s Bank of China cut interest rates to stimulate economic growth.

Soaring bad debts are also weighing on their income as they set aside a large amount of funds to cover possible defaults.

The sector’s non-performing loan ratio rose to 1.74 per cent at the end of 2016 from 1.67 per cent a year ago, although it fell a marginal 0.02 per cent from the previous quarter, the first quarterly decline since 2011.

In the face of sluggish earnings in the first half of 2016, the top four state players have eliminated a total of 22,260 jobs.

However, such cost-cutting measures by the sector have provided little relief. According to a report by Ping An, listed banks are expected to post just a 1 per cent drop in the cost-to-income ratio to 28 per cent for the past year.

In December, Fitch Ratings issued a negative outlook for China’s banking sector, saying the government’s reliance on debt to support economic growth would add to banks’ credit risks.

The rating agency also said banks’ profitability would remain squeezed due to another possible cut in the benchmark one-year lending rate and further migration of deposits towards high-yielding wealth management products, one of the main sources of shadow banking.

However, some believe the lenders will soon see their worst time. Morgan Stanley has recently raised the earnings forecasts for China’s banks by 1 per cent for 2017 and 3 per cent for 2018, citing growing financing demand from both factories and consumers.

Even as the central bank tightened its monetary policy, stronger-than-expected expansion in the services sector and consumption could support infrastructure investment and feed into rational credit demand, analyst Richard Xu said.

A recovery in the manufacturing sector also meant businesses could pay higher interests, he said.

China’s producer price index rose 6.9 per cent in January from a year earlier, the fastest pace of increase since August 2011.

As such, net interest margins for the banks are expected to bottom out in the first half of this year before a rebound in 2018 and 2019.

“We see the start of a multi-year earnings upgrade, an expansion cycle in net interest rates and continued improvement in asset quality,” Xu said.

SWS estimated net profit growth for the listed banks would accelerate to 5.4 per cent in 2017.