Stable earnings growth expected by mainland banks, but bad-loan worries linger

The escalating trade war between China and the US, may well turn out to be good news for the former’s major banks in the second half of the year.

As officials of both countries continue their tit-for-tat moves against each other, Beijing has said it is now prioritising infrastructure projects at home, and firms of all sizes hurt by the US tariffs could well be turning to credit to help with that.

Increasing net interest margins are set to help improve bank performance, says Morgan Stanley, which now expects the major mainland lenders to post stable earnings growth in the second half after reporting moderate interim profit rises.

Any bank investors thinking nostalgically of the good old days, have good reason to smile again as loosened credit conditions are now likely to fire up earnings from better interest margins – the difference between interest income and the amount of interest paid out to depositors.

“It is unlikely to become a reckless lending spree, but credit easing is a sure bed to bolster economic growth,” said He Yan, a fund manager with Shanghai Shiva Investment.

“The banking sector is always a top beneficiary of monetary easing when the leadership decides to give a lift to a troubled economy.”

For the decade between 2003 and 2013, mainland banks posted compound annualised profit growth of 49 per cent, in tandem with the country’s surging debt-fuelled economic expansion.

Since the incumbent leadership took office in late 2012, efforts to slash debt levels in an economy facing risks of increasing piles of it have continued.

But Beijing is also now encouraging local governments to spend on infrastructure projects and agriculture, refuelling what is expected to be a strong demand for lending.

Vice-premier Liu He is also urging the banking sector to support small export-oriented firms that have fallen victim to the punitive trade measures being slapped on China by the US.

And Beijing’s crackdown on the peer-to-peer lending sector – the shadow banking system that saw rampant illicit and risky behaviour continue in the first half of this year – has helped increase demand for corporate lending levels too.

The country’s big four banks – Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China – reported profit rises of between 5.2 and 7.9 per cent in the three months ending June.

Bank of Communications, the fifth-largest mainland lender, posted a 5.2 per cent gain in net income during the same period.

Bank of China posts 5 per cent rise in first-half profit

All the top four said they would accelerate credit allocation marginally in the remainder of the year.

Cliff Sheng, a partner with business consultancy Oliver Wyman, said the risks previously associated with infrastructure lending going sour has lessened since most projects are now firmly backed by the government.

“But for unsecured loans extended to small businesses, banks are now taking tighter measures to ward off risk of potential defaults.”

Timothy Mak, a China banking analyst at brokerage Everbright Sun Hung Kai, also warns that any loosening in credit conditions carries the risk of rising default levels.

“We are unlikely to see any sharp rise in bad loans in the second half of this year,” said Mak.

“Some non-performing loans have already been written off in the first half,” he added, but more are likely to surface next year as a result of the loosening.

As the larger banks raise their lending, however, analysts suggest the regulator may well clamp down harder on smaller operators to make sure bad debt remains under control.

Agricultural Bank of China defines a loan as overdue when it is 30 days past its repayment deadline, compared to the regulator’s standard 90-day threshold.

According to Bloomberg, “risk” remains firmly on the agenda of China’s six largest banks.

With total assets of US$16 trillion, it reported the quirky statistic recently that the word appeared 1,900 times in their combined interim earnings announcements, a 9 per cent rise on the same period last year.

“They are aware of the risks [involved in accelerated lending],” said Ivan Li, an asset manager with Loyal Wealth Management.

“Financial stability is still the key issue facing China’s economy and the bankers and regulators are abundantly aware of its significance.”