Mind The Big Red Banks—-Q1 Profits Flat, Loan Books Deteriorating

By Engen Tham & Matthew Miller at Reuters

Four of China’s five largest state-owned banks barely posted any growth in profit in the first quarter, as widely expected, with rising bad debt and narrower margins hitting their bottom lines.

The country’s banks face challenges from both defaulting borrowers, who are struggling amid a slowing economy, and successive cuts in interest rates which have eaten away at margins.

Industrial and Commercial Bank of China Ltd (ICBC) (601398.SS) (1398.HK), China’s biggest lender by assets, announced a 0.6 percent rise in net profit on Thursday.

Bank of Communications Co Ltd (BoCom)(601328.SS)(3328.HK) posted a 0.5 percent rise in net profit in the first quarter and Agricultural Bank of China Ltd (AgBank) (601288.SS)(1288.HK) a slightly better 1.1 percent rise in profit.

On Tuesday, Bank of China (BoC) (601988.SS)(3988.HK) recorded a 1.7 percent rise in net profit in the fist quarter.

Non-performing loan (NPL) ratios remained flat – or rose – at all four lenders, while bad loan volumes increased, helping to sink loan-loss allowance ratios.

At ICBC, the volume of non-performing loans increased 14 percent in the three-month period to 204.66 billion yuan ($31.60 billion), from 179.52 billion yuan at the end of 2015, sending the bank’s NPL ratio to 1.66 percent from 1.5 percent.

ICBC’s loan-loss allowance ratio fell to 141.21 percent, from 156.34 percent at the end of December.

ICBC also pointed to “the continuing impact of five interest rate cuts by the People’s Bank of China” since 2015 as a source of stress.

The bank reported its interest margin (NIM) – the difference between its lending rate and the cost of borrowing – fell to 2.28 at the end of the first quarter, from 2.47 at end-December.

At BoC, NIM fell to 1.97 at end-March from 2.12 at end-December.

BoCom did not disclose its NIM, but reported a 2.78 percent decline in net interest income, even as the bank’s net income rose half a percent to 19.07 billion yuan for the first quarter. AgBank also did not disclose its NIM.

In a bid to relieve banks of the mounting pile of bad debts, China’s central bank is preparing regulations that would allow commercial lenders to swap non-performing loans of companies for stakes in those firms, sources told Reuters in February.

Source: China’s Banks Post Flat Profit Growth as Bad Debts Rise – Reuters