Source : SCMP
1 Nov 2012
China’s top four banks are on course for their weakest annual profit growth since going public, as the central bank’s interest rate cuts in the middle of the year kick in, slicing lending margins.
After posting profit gains of more than 20 per cent for years, the so-called “Big Four”, led by Industrial and Commercial Bank of China (ICBC), are expected to report growth of as little as 5 per cent this year, according to Thomson Reuters Starmine.
That would be the slimmest growth since China Construction Bank (CCB) became the first of the four to list in 2005, following the central bank’s interest rate cuts in June and July.
“As loans mature, they will have to be re-priced downwards based on the new benchmark rate,” said Bill Stacey, an analyst at KBW in Hong Kong. “The margin pressure has been deferred, but it’s coming.”
The sobering estimate comes after the banks, including Agricultural Bank of China and Bank of China, surpassed third-quarter profit expectations, helped by the central bank’s landmark decision to allow lenders to set their own loan rates.
ICBC, whose market value alone is roughly equal that of Bank of America, Morgan Stanley and Goldman Sachs put together, said on Wednesday it expects margins to fluctuate around current levels.
“There will be some volatility with margins, but things should remain largely stable,” ICBC’s president Yang Kaisheng said on a conference call with analysts. Barclays estimates ICBC’s net interest margin was about 2.7 per cent in the third quarter.
Smaller lenders such as Bank of Communications will be hit worse by the rate cuts, having reported earnings that largely met expectations as a rise in loan volumes offset flat to narrower interest margins.
The central bank’s rate cuts – and the resulting narrower margins – will be felt most keenly by the smaller banks, including China CITIC Bank and China Minsheng Bank, which have no choice but to compete with state-owned behemoths by offering cheaper loans.
China Minsheng’s third-quarter net interest margin narrowed 10 basis points to 3.04 per cent, while China Merchants Bank’s margin shrank 11 basis points to 2.92 per cent.
The plight of the smaller banks will also be exacerbated by a scramble for deposits after the central bank gave lenders more leeway in setting their own deposit rates, on top of loan rates.
“None of them have enough market share to have the ability to fix interest rates,” said Jim Antos, an analyst at Mizuho Securities in Hong Kong.
The better-than-expected third-quarter earnings growth posted by the Big Four would have been smaller if they had taken bigger impairment charges by putting aside more funds as provisions for bad loans.
By cutting back on provisions, a greater sum of a bank’s revenue can be counted as profit.
“It depends which direction an investor thinks earnings can go,” said Alexander Lee, an analyst at DBS Vickers. “If you think things are going to get worse, then a bank isn’t setting aside enough. If you think things will get better, then it’s great because it means more profits.”
Bank of China, which posted its biggest quarterly gain in a year, would have seen its earnings slashed by 2 billion yuan (HK$2.5 billion) in July-September if it had set aside more funds to cover potential bad loans, according to DBS Vickers.
ICBC reduced impairment charges by about 1.9 billion yuan in the quarter from a year earlier.
On average, China’s banks set aside 50 basis points of their loan books as impairment charges. A basis point is 0.01 per cent.
The cut in impairment charges comes at a time when many investors are expecting a spike in non-performing loans from the official 0.97 per cent rate. The NPL ratio in China’s entrepreneurial hub of Wenzhou has more than doubled to 3 per cent, according to state media.
Chinese bank officials deny there is a significant rise in bad loans, returning to their oft-repeated line that they are controlling lending tightly and have looked again at the books of borrowers who may be in danger of default.
“We’ve been very successful at controlling our credit risks,” said Zeng Jianhua, CCB’s chief financial officer, during a conference call with analysts on Tuesday. “We are confident our asset quality will remain healthy.”
