Hong Kong company reporting season

Cost cutting delivers profit growth for China state-owned banks CCB and ICBC

Greater pressure on bad loans at ICBC, but CCB sees its NPL ratio fall

PUBLISHED : Thursday, 30 March, 2017, 9:27pm
UPDATED : Thursday, 30 March, 2017, 10:58pm

Cost cutting in 2016 delivered a slight rise in full year net profit for both China Construction Bank (CCB) and ICBC despite falls in income.

CCB’s net profits for the year rose 1.7 per cent year on year to 233 billion yuan (US$33.8 billion) while ICBC saw a 0.5 per cent year on year increase to 279 billion yuan.

Analysts had been expecting CCB to post a rise, but ICBC’s came as a surprise with a slight decline having been forecast.

“Competition [in the banking sector] is about the struggle to control costs and the struggle to control risks,” ICBC chairman Yi Huiman said at a press conference in Beijing on Thursday. In 2016, ICBC did better on the former than the latter as unlike other Chinese state owned banks, its much watched non performing loan (NPL) ratio rose in 2016.

The increases in profit occurred despite significant falls in both banks’ income. At CCB, full year income in 2016 was 26.8 billion yuan lower compared to 2015 due to a collapse in its net interest margins, while ICBC’s was lower by 27 billion yuan.

However, both were able to cut expenses – CCB by 12 per cent, or 23 billion yuan, and ICBC by 12.5 per cent. Growth in fee and commission income made up the difference to enable the two to post a profit increase, albeit a small one in the case of ICBC.

Competition [in the banking sector] is about the struggle to control costs and the struggle to control risks
ICBC chairman Yi Huiman

With reference to CCB, Victor Wang, a Jeffries banking analyst who has a “buy” rating on the bank, said: “The cost cutting, excluding tax changes, was a decent effort especially when you consider that there was some salary inflation in 2016, and that, as an SOE (state-owned enterprise), CCB can’t make dramatic cuts to headcount.”

CCB’s staff costs actually rose to 92.8 billion yuan but a substantial decline in business taxes as well as cost savings in other areas contributed to the decline in expenses.

ICBC cut its headcount by 1 per cent in 2016, Yi said on Thursday.

“All the banks have been cutting costs in areas like business travel, and have also done a lot to digitise their procedures,” analyst Wang said. “As an example, China Merchants Bank has said that the cost of a mobile-based transaction is 0.27 yuan, which is 50 times lower than an equivalent counter-based transaction.”

The fall in the banks’ net interest margins were a result of changes in tax regulations and a decline in interest rates in 2015 and early 2016, which Wang described as being “one offs”.

Where ICBC and CCB’s performance differed was with regard to their asset quality. ICBC’s NPL ratio rose by 12 basis points in 2016 to 1.62 per cent at the end of December, whereas CCB’s declined by 6 basis points to 1.52 per cent. Earlier this week, Agricultural Bank of China and Bank of Communications also published lower NPL ratios.

“NPLs didn’t only bottom out in 2016 they will also improve steadily in 2017,” Wang Hongzhang, CCB’s chairman, said at a press conference in Hong Kong on Thursday.

Jefferies’ Wang offered a more nuanced view, but one broadly in agreement.

“NPL formation at CCB appears to have peaked in 2016, and so we should see a gradual decline in NPL ratios this year,” he said.

Chinese banks feel pinch from falling interest income

CCB management also said at the press conference that they had no outstanding loans to the embattled Huishan Dairy, having chosen in 2013 not to roll over a loan of 400 million yuan when it was due.

Despite meeting expectations when its results were announced late Wednesday, CCB’s shares fell 1.25 per cent on Thursday to close at HK$6.33, but the stock is still up 10 per cent in the last six months.

ICBC, which released its results after the market closed on Thursday, fell 0.97 per cent to HK$5.12.

Of China’s largest state owned banks, only Bank of China has yet to release its full year results, which it will do on Friday.

On Tuesday, Agricultural Bank of China posted a 1.8 per cent rise in profits, and Bank of Communications a 1 per cent rise.