Hong Kong company reporting season

Agricultural Bank of China beats expectations on cost savings

Bank posts a net profit increase of 1.8 per cent, despite collapse in net interest margin

PUBLISHED : Wednesday, 29 March, 2017, 10:21pm
UPDATED : Wednesday, 29 March, 2017, 10:21pm

Agricultural Bank of China saw its net profits rise by 1.8 per cent in 2016, beating analysts’ expectations, the third state owned Chinese bank to do so in a week.

The bank posted full year net profits of 184 billion yuan (US$26.7 billion), up from 180 billion yuan in 2015. Analysts had been predicting a 2 per cent fall.

ABC also revealed that it had lent money to Huishan Dairy, the troubled firm whose share price fell 85 per cent in Hong Kong last week.

Li Zhicheng, the bank’s chief risk officer, said at a press conference in Beijing that the bank had lent 110 million yuan and HK$150 million to Huishan, with “equity as collateral.”

Li added that ABC had since taken measures to dispose of the loans.

At least 23 banks lent money to the firm.

ABC’s profit rise was in spite of a major 41 basis point drop in the bank’s net interest margin, and a subsequent 38 billion yuan decline in net interest income.

Net interest income makes up the largest proportion of the income of all of China’s largest banks, 78 per cent in the case of Agricultural Bank of China in 2016.

“The decline in net interest margin was a major miss,” said Leon Qi banking analyst at Daiwa Capital Markets, who says he favours ABC least among the big five Chinese banks.

In its statement to the Hong Kong stock exchange, the bank attributed the decline in net interest margin to the consecutive reduction of interest rates by the PBOC from November 2014 to 2015, the decline in the yields of its lending, investments and financing businesses compared to the previous year, and changes in VAT assessment.

Qi added that another contributer was the fact that a sizeable proportion of the bank’s new lending was mortgages which are traditionally low yielding.

“In 2017, the net interest margin will face great pressure, but the scale of the decline is likely to be less than in 2016,” said Lou Wenlong, a vice president at ABC.

In 2017, the net interest margin will face great pressure, but the scale of the decline is likely to be less than in 2016
Lou Wenlong, a vice president at ABC

Victor Wang, a banking analyst at Jefferies noted that the impact of the net interest margin decline was largely offset by an increase in fee and commission income and cost management.

Wang described the 6 per cent fall in expenses as “impressive”.

Fee and commission income rose by 10.2 per cent to 90.9 billion yuan, particularly due to increased revenue from wealth management and investment banking.

Agricultural Bank of China also posted a marginal improvement in its NPL ratio which dropped by two basis points to 2.37 per cent at the end of 2016. Its overdue loan ratio and special mention loan ratio both dropped by 30 basis points.

The two measures refer to loans that are troubled, but not yet officially non performing.

With regard to its bad loans more broadly, ABC’s president Zhao Huan said the bank would seek to manage its NPL situation in 2017 using a number of strategies including securitising bad loans and carrying out further debt for equity swaps.

“We carried out 70 billion yuan worth of debt for equity swaps in 2016, and we will see more in 2017,” Zhao said.

The slowdown in NPL formation, which has also been seen at other banks, may indicate that Chinese banks’ asset quality problems are improving.

“Across all banks, this particular NPL cycle seems to be bottoming out, but whether it is sustainable depends on whether last year’s improving macro economic situation based on commodities and property is also sustainable,” said Qi.

“As well, many market observers do not believe the NPL figures across China’s banking sector, and this has been a major overhang on valuations in recent years. If the figures are not believed, then any improvement in NPL figures will have little impact on how Chinese banks are valued.”