March 29, 2016 / 10:18 AM / 3 years ago

China's BoCom sees tough 2016 as corporate banking dives

BEIJING/SHANGHAI (Reuters) - Bank of Communications Co Ltd (BoCom) (601328.SS) (3328.HK), China’s fifth-largest lender, said hitting 1 percent profit growth in 2016 will be a stretch, reporting a dive in corporate banking as bad debts keep mounting.

People walk past the Bank of Communications at its central branch in the financial district of Hong Kong in this August 19, 2009 file photo. REUTERS/Aaron Tam/Files

BoCom reported its fourth year of slowing profit growth on Tuesday, while the bank’s bad loan ratio increased for the 15th consecutive quarter.

“To maintain 1 percent net profit won’t be easy,” BoCom’s president Peng Chun said during a news conference in Hong Kong when asked how the bank’s earnings would compare to last year.

For the whole of 2015, net profit rose 1 percent from a year earlier to 66.53 billion yuan (7.14 billion pounds), according to annual results released on the Hong Kong and Shanghai stock exchanges.

Borrowers have struggled to repay loans as the economy slows, prompting a dive in corporate banking gross profits, which fell 18.1 percent to 44.5 billion yuan.

At the end of last year, the corporate impaired loan balance rose 30 percent to 44.284 billion yuan. In past performance results, BoCom has cited the manufacturing sector as a large source of corporate defaults.

The rise in bad debt across China’s banks has prompted authorities to introduce unprecedented measures to try to help.

BoCom’s non-performing loan ratio rose to 1.51 percent by end-December, from 1.42 percent at end-September.

The central bank is preparing to allow banks to accept debt-for-equity swaps, while freeing them to issue asset-backed securities with soured loans as the underlying asset, to give lenders breathing space in the face of rising borrower defaults.

Profit rose 1 percent to 14.5 billion yuan in the three months through December versus the same period a year prior, according to a Reuters calculation from BoCom’s figures.

The result compared with the 13.3 billion yuan average estimate from 21 analysts polled by Thomson Reuters on their expected yearly net profit.

MARGIN SQUEEZE

BoCom’s net interest margins - the difference between a bank’s borrowing rate and interest earned on loans - fell to 2.22 percent from 2.24 percent at end-September.

The bank said in its annual results that the margin squeeze was “due to the gradual acceleration of interest rate liberalisation.”

Loan loss provisions, the amount of capital a bank has to set aside to buffer against bad debts, fell to 155.57 percent from 165.3 percent in the previous quarter.

China’s banks have been lobbying for a lower minimum provision ratio - currently 150 percent - to free up capital and raise profits.

The smallest of the leading state-owned banks may soon have its fifth place position usurped by the nimbler China Merchants Bank Co Ltd (CMB) (600036.SS) which is gaining ground on net profits.

CMB posted January to September profit of 48.8 billion yuan against BoCom’s 52.0 billion yuan.

Reporting by Shu Zhang in BEIJING and Engen Tham in SHANGHAI; Additional reporting by Elzio Barreto; Editing by Christopher Cushing/Ruth Pitchford

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