Banking on brighter prospects

Country's 'Big Four' banks are set to see a dipin profit growth amid an economic slowdown, Jiang Xueqing reports

China's major banks recorded slower profit growth in 2013 as they tightened control over lending to struggling industries, real estate markets and local government financing vehicles amid an economic downturn.

On Monday, China Construction Bank Corp, the nation's second-largest bank by assets, announced that its net profit rose 11.1 percent to 215.12 billion yuan ($34.6 billion) last year, the second-slowest pace since the bank was listed on the Hong Kong Stock Exchange in 2005.

Industrial and Commercial Bank of China Ltd, the nation's largest lender, posted a net profit of 263 billion yuan for 2013 on March 27, up 10.2 percent from the previous year, but the profit growth went short of the 14.5 percent expansion in 2012 and was the slowest since its initial public offering in 2006.

Bank of China Ltd, the nation's fourth-biggest lender, reported a 12.35 percent profit rise on March 26, the bank's third-slowest growth since it went public in 2006.

Agricultural Bank of China Ltd, the third-biggest lender, said on March 25 that its profit increased 14.5 percent last year for its slowest growth since listing its shares in 2010, down from 19 percent in 2012.

The slowdown in profit growth for China's State-owned banks is in line with the country's cooling economy.

China lacks a new engine of economic growth and is still in the process of developing new ways to stimulate the economy, said Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics in Beijing.

"We anticipate that the profit growth of the Chinese banking industry is very likely to fall below 10 percent this year. It will gradually narrow down to a level that equals to or goes slightly above that of the country's GDP growth," Guo said.

His forecast was echoed by Ni Jun, a financial analyst at Shanghai-based Greenwoods Asset Management.

Ni pointed out that the economic slowdown will lead banks to lower lending interest rates while raising the nonperforming loan ratio and allowance for nonperforming loans, which indicate the extent of funds a bank has kept aside to cover loan losses. As a result, the banks will suffer from a profit squeeze.

"Because the Chinese economy is weakening this year, nonperforming loans will increase significantly. The asset quality of commercial banks will remain under pressure for at least a year," he said.

The major banks generally increased write-offs and transfers of bad loans to keep their NPL ratios at a low level last year.

CCB cleaned up 48.5 billion yuan worth of nonperforming loans in 2013, including write-offs of 15.7 billion yuan.

ICBC wrote off 16.5 billion yuan of bad loans last year, more than doubling the 7.53 billion yuan in 2012.

ABC also more than doubled its write-offs and "transfer-out" to 9.78 billion yuan, which in part contributed to the drop of its NPL ratio to 1.22 percent in 2013 from 1.33 percent in the previous year.

The "Big Four" banks tightened their grip on nonperforming loans after the China Banking Regulatory Commission warned of asset quality risks.

"We are following our asset quality closely," said Chen Siqing, president of BOC.

In 2013, BOC cut its loans to local government financing vehicles by 11.24 percent from the previous year to 353.5 billion yuan. Its loans to industries with excess capacity fell 7.8 percent to 188.5 billion yuan.

By the end of 2013, ICBC reduced its outstanding loans to LGFV by 94.3 billion yuan, to the property market by 8.6 billion yuan and to industries suffering from excess production capacity by 19.9 billion yuan from the previous year.

Compared with major State-owned banks, the assets of smaller banks deteriorated faster as they chose higher-risk projects.

China CITIC Bank Corp Ltd's nonperforming loans increased 62.9 percent to 19.97 billion yuan last year.

The growth of bad loans requires relevant banks to set aside a larger amount of allowances for loan impairment losses to NPL, thus narrowing the banks' profits, which are also reduced by the liberalization of interest rates.

China will lift its control over deposit rates in one or two years, said Zhou Xiaochuan, governor of the People's Bank of China, at a news briefing on March 11. That will lead to a further compression of the banks' net interest margins.

Interest rate liberalization will put higher pressure on profit growth for the banks whose branches are concentrated in cities where the competition is more intense than in county areas, said Ni of Greenwoods Asset Management.

Among the four largest lenders, ABC faced less pressure on net interest margins because the county area banking business accounted for nearly 40 percent of its total operating income.

With ongoing economic recovery in the United States and Europe, BOC also felt less stressed because its overseas assets amounted to $630.8 billion by the end of 2013, contributing nearly 26 percent of its total assets.

"Although China's commercial banks face mounting pressure, they are still likely to maintain a relatively optimistic operating situation," said Guo of the Central University of Finance and Economics. "That's because the banks have improved their abilities in corporate governance, risk-resistance and market-oriented management after several years of banking reform."

Furthermore, financing conditions remain tight this year, thus putting the banks in a favorite environment where the demand for loans exceeds the supply, he added.

Contact the writer at jiangxueqing@chinadaily.com.cn