China's big banks set for slowest annual profit growth since going public
HONG KONG (Reuters) - 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 percent for years, the so-called "Big Four", led by Industrial and Commercial Bank of China Ltd (ICBC) (1398.HK: Quote), are expected to report growth of as little as 5 percent in 2012, according to Thomson Reuters Starmine.
That would be the slimmest growth since China Construction Bank Corp (CCB) (0939.HK: Quote) 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 Ltd (1288.HK: Quote) and Bank of China Ltd (3988.HK: Quote), surpassed third-quarter profit expectations, helped by the central bank's landmark decision to allow lenders to set their own loan rates.
Smaller lenders such as Bank of Communications Ltd (3328.HK: Quote) 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 Corp Ltd (0998.HK: Quote) and China Minsheng Bank Corp Ltd (1988.HK: Quote), 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 percent, while China Merchants Bank Co Ltd's (600036.SS: Quote) margin shrank 11 basis points to 2.92 percent.
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.
IMPAIRMENT CHARGES
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 in July-September if it had set aside more funds to cover potential bad loans, according to DBS Vickers.
ICBC (601398.SS: Quote) 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 percent.
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 percent rate. The NPL ratio in China's entrepreneurial hub of Wenzhou has more than doubled to 3 percent, 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."
After posting profit gains of more than 20 percent for years, the so-called "Big Four", led by Industrial and Commercial Bank of China Ltd (ICBC) (1398.HK: Quote), are expected to report growth of as little as 5 percent in 2012, according to Thomson Reuters Starmine.
That would be the slimmest growth since China Construction Bank Corp (CCB) (0939.HK: Quote) 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 Ltd (1288.HK: Quote) and Bank of China Ltd (3988.HK: Quote), surpassed third-quarter profit expectations, helped by the central bank's landmark decision to allow lenders to set their own loan rates.
Smaller lenders such as Bank of Communications Ltd (3328.HK: Quote) 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 Corp Ltd (0998.HK: Quote) and China Minsheng Bank Corp Ltd (1988.HK: Quote), 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 percent, while China Merchants Bank Co Ltd's (600036.SS: Quote) margin shrank 11 basis points to 2.92 percent.
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.
IMPAIRMENT CHARGES
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 in July-September if it had set aside more funds to cover potential bad loans, according to DBS Vickers.
ICBC (601398.SS: Quote) 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 percent.
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 percent rate. The NPL ratio in China's entrepreneurial hub of Wenzhou has more than doubled to 3 percent, 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."
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