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End of easy profits for China banks

China Q2 bank earnings to signal end of bumper profits era

Image Credit: Bloomberg
A branch of the Agricultural Bank of China Ltd. in Beijing. Analysts say China’s banks will reportmore modest earnings growth in the future.
Gulf News

HONG KONG:China’s big banks are set to report possibly their last set of bumper profits in coming weeks as weak economic expansion, shrinking deposits and a more competitive interest rate market point to more modest earnings growth in the future.

The big banks such as Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB) and Agricultural Bank of China Ltd (AgBank) due to report their first-half earnings this week.

“Deposit growth has slowed down, partly because of outflows to investment products that offer higher returns. ”Tweet this

“The last solid results, with a bumpy road ahead,” said Deutsche analyst Tracy Yu. “We remain cautious on the Chinese banks, although solid first-half results might be supporting of the share price in the short ter.Profit growth is already slowing down.

ICBC, the world’s biggest bank by market capitalisation, is expected to say first-half net profit rose 15 pe rcent from a year earlier, a Reuters survey of nine analysts shows. But that would be almost half the pace it reported for the first half of 2011.

The slowdown became even more pronounced in the second-quarter, when analysts estimate net profit growth slowed down to 9.5 percent, or 60.98 billion yuan.

CCB and AgBank are expected to report second-quarter net profit growth of 11 percent and 19 percent, respectively. Fourth-ranked Bank of China is likely to post a 4 percent rise in quarterly profit.

A seemingly endless flow of deposits insulated China’s major banks from poor lending decisions in recent years. They could rely on government-set fixed net interest margins and a steady economic growth rate of at least 10 per cent.

But the banking landscape is changing.

Deposit growth has slowed down, partly because of outflows to investment products that offer higher returns. Since the start of 2011, banks have suffered net monthly declines in yuan deposits five times, compared with just once between 2002 and 2010.

This year the central bank raised the competitive stakes by giving banks more leeway to set their own deposit and lending rates. Commercial banks can now set deposit rates at up to 1.2 times the benchmark central bank rate.

“Margins will likely fall more in the second half of this year, partly because of the interest rate liberalisation we’re seeing,” said Tan Yuansheng, president of Chongqing Rural Commercial Bank, which reported a 25 percent jump in its first-half earnings on Aug. 17.

The net interest spread has tightened to just 0.9 per cent, based on the lowest permissible lending rates and highest permissible deposit rates, from more than 3 percent as recently as June.

Economic growth is seen sliding this year to around 8 per cent, its worst showing since 1999, feeding expectations of a rise in bad loans, currently running at less than 1 percent. Some sectors are already feeling the pinch.

More than 20 steel traders have been taken to court by lenders such as China Minsheng Bank over debt defaults in the past two months. Such court action has been rare in China.

The hangover from the lending spree sparked by China’s 4 trillion stimulus package during the global financial crisis in 2008-2009 is also now weighing.

Bad loans are now likely to rise to about 3-5 per cent as some of those loans come due, said Gigi Chan, who manages the China Opportunities Fund at