China's big banks set for hard slog as margins shrink

August 30, 2016 9:22 AM EDT

The Industrial and Commercial Bank of China Ltd (ICBC) logo is seen on a building at sunrise Buenos Aires, Argentina, August 10, 2016. REUTERS/Enrique Marcarian

News and research before you hear about it on CNBC and others. Claim your 2-week free trial to StreetInsider Premium here.

By Engen Tham and Shu Zhang

SHANGHAI/BEIJING (Reuters) - Four of China's so-called 'Big Five' state-owned banks have warned that profits will continue to be pressured in the second half of the year, as slowing growth in the world's second-biggest economy hits borrowers and saps lenders' margins.

Chinese banks, among the world's biggest by market value, also face rising volumes of sour debt, forcing a quicker pace of write-offs - even as a series of rate cuts has chipped away at their interest income.

Industrial and Commercial Bank of China (ICBC) <1398.HK> <601398.SS>, Bank of China (BoC) <3988.HK> <601988.SS>, Agricultural Bank of China (AgBank) <1288.HK> <601288.SS> and Bank of Communications (BoCom) <601328.SS> <3328.HK> all warned of tough times ahead.

BoC's chief risk officer Pan Yuehan said the bank faces "relatively big pressure" in the near future, while ICBC's chairman Yi Huiman said bad loans will continue to rise.

ICBC, the biggest bank by assets, and BoC reported near flat half-year profits on Tuesday, and shrinking net interest margins (NIM) - the difference between interest earned on loans and that paid out to depositors.

The lacklustre first-half - a far cry from the banks' strong double-digit profit growth just two years ago - raises the prospect that the government will have to inject more than $100 billion to shore them up, some analysts have said.

ICBC's Yi said the four biggest banks - ICBC, BoC, AgBank and China Construction Bank (CCB) <601939.SS> <0939.HK> - and four leading asset management companies would be included in a government debt-to-equity pilot scheme, which aims to let industrial firms convert their debt into equity stakes.


ICBC's margins narrowed to 2.21 percent at end-June from 2.28 percent a quarter earlier, while those at BoC slipped to 1.9 percent from 1.97 percent.

"Successive interest rate cuts and repricing of deposits and loans narrowed the interest spread," ICBC said in a statement on its earnings.

ICBC's Yi said he expects the bank's NIM to contract by 6-7 basis points in the second half, noting that each basis point drop costs more than 2 billion yuan in lost profit.

Last week, AgBank, BoCom and CCB also reported lower margins.

"One surprise is the NIM pressure. We hadn't anticipated the banks would report net interest income declining in the second quarter, but a number of them did," said Min Zhou, a banking analyst at AB Bernstein.

China's central bank cut interest rates last October for the sixth time in less than a year in a bid to jump-start growth in the stuttering economy.

The squeeze on margins has also put pressure on banks' capital strength, analysts said, with all the big five banks seeing their core capital slip, again raising the likelihood of a government bail-out.

While core capital - an indicator of a bank's ability to take financial stress and remain solvent - at the five banks hovers between around 10-13 percent, above a 10.5 percent minimum lenders need to achieve by 2018, it has dipped from the previous quarter.


Last week, AgBank's chairman Zhou Mubing said good companies are not borrowing from banks, but issuing bonds or equity instead, while the bank's vice-president said profit growth in the second half would come under big pressure.

BoCom President Peng Chun warned that soured debt had still not bottomed out and the downward cycle would likely persist.

Non-performing loan (NPL) ratios remained steady at the five big banks as they were quick to dispose of these.

ICBC wrote off 44.8 billion yuan ($6.71 billion) of soured debt in the first half alone, compared to 60.2 billion yuan in the whole of last year. BoC disposed of 29.2 billion yuan in January-June, compared to 45.2 billion yuan in all of 2015.

AgBank's first-half bad debt write-offs of 38.3 billion yuan were only around 3 billion yuan less than in all of last year, and the bank's president Zhao Huan said it plans to increase disposals in the second-half.

"The credit quality pressure is going to continue in the second half and for next year, as the economy slows further and the central government has the intention to push supply-side reforms," said Zhou, the AB Bernstein analyst, adding that a clamp down on industries with large over-capacity - such as the coal and steel sectors - would be "bad news" for banks.

To digest some of the rising tide of bad debt, both ICBC and BoC plan to issue NPL asset-backed-securities. ICBC said these could be issued as early as next month, and a first batch would not exceed 5 billion yuan.

CCB's chief risk officer Zeng Jianhua, however, saw some light down the tunnel. "I expect asset quality hit bottom last year. The worst was last year," he said.

($1 = 6.6741 Chinese yuan renminbi)

(Reporting by Engen Tham in SHANGHAI and Shu Zhang in BEIJING, with additional reporting by Matthew Miller in BEIJING; Editing by Muralikumar Anantharaman and Ian Geoghegan)

Serious News for Serious Traders! Try Premium Free!

You May Also Be Interested In

Related Categories


Related Entities

Sanford C. Bernstein, AgBank, Earnings

Add Your Comment