SHANGHAI/HONG KONG (Reuters) - China’s biggest listed state-owned lenders are expected to post modestly higher profits and steady margins for the six months ended June, as government efforts to boost spending and liquidity underpins loan growth.
Beijing has been pumping funds into the banking system and rolling out support measures for local businesses to cushion the impact from an escalating trade war with the United States. The two countries implemented tariffs on $34 billion worth of each others’ goods in July.
But analysts fear an unrestrained, credit-fueled growth, could worsen a build-up in bad loans, already at nine-year highs, as the world’s No.2 economy cools, undermining Beijing’s push to reduce riskier lending and a mountain of debt.
Indications on future trends are expected to emerge over the coming weeks as the country’s top banks - Industrial and Commercial Bank of China (601398.SS), China Construction Bank Corp (601939.SS), Agricultural Bank of China (601288.SS), Bank of China (601988.SS) and Bank of Communications Co Ltd (601328.SS) - unveil their January-June results.
Profits for China’s top five banks are expected to have risen by 4.7-7 percent, said analysts surveyed by Thomson Reuters. In 2017, the banks saw profits rise 2.8-4.9 percent.
Due to better loan margins, “I expect no major changes either up or down, so stable earnings situation”, said Nicholas Zhu, a Moody’s banks analyst, referring to the top-tier banks.
Their results will also be underpinned by the diversity “in their asset base source of income”, he added.
For smaller lenders, however, the story is different as they are being hit harder by Beijing’s crackdown on risk in the broader financial system.
(Graphic: China's big five banks performance interactive: tmsnrt.rs/2L8phnc)
By the end of the June quarter, the non-performing loan ratio for the banking sector reached 1.86 percent, data from the China Insurance and Banking Regulatory Commission shows.
This was the highest since 2009.
Bad loans spiked 183 billion yuan ($26.62 billion), the biggest quarterly jump since the regulator began publishing data in 2003.
“The market expects a deterioration in quality of assets in the banking sector because of the slowing down of the economy,” said Steven Leung, Hong Kong-based sales director, UOB Kay Hian.
The weaker yuan CNY=CFXS, which has fallen for 10 weeks, is also likely to drag on lenders' offshore loan portfolios, said Leung, who has a "buy" rating on the top banks because of low valuations and high dividend yield.
Small banks, hurt by Beijing’s move to cut excess industrial capacity and curb pollution, are seeing a spike in bad loans, with some reporting zero or negative capital adequacy ratios.
New asset management rules due to come into play in the middle of next year have already squeezed smaller banks, which depend to a greater extent on income from the sales of wealth management products, analysts said.
The situation could get more complicated in the event of an economic slowdown and a surge in corporate defaults.
So far, official data shows limited impact from the U.S-China trade spat, but some economists are trimming China growth estimates saying tougher tariffs will bite.
China’s Politburo, the Communist Party’s top decision-making body, said last month it would achieve this year’s GDP growth target of around 6.5 percent, despite mounting risks. The economy expanded 6.9 percent in 2017.
Beijing’s recent easing, ranging from encouraging banks to raise investment in bonds of corporates and other entities to allowing greater access to Medium Term Loan Facilities, should be a silver lining for smaller lenders.
“Since the main source of debt for the four major banks is deposits, the relative benefit (of Beijing’s easing) is less than for small and medium-sized banks,” said Duan Taotao, a banks analyst at Industrial Securities.
Reporting by Engen Tham in Beijing and Sumeet Chatterjee in Hong Kong; additional reporting by Gaurav Dogra in Bengaluru and Shu Zhang in Beijing; Editing by Himani Sarkar