BEIJING/SHANGHAI (Reuters) - The risk of deteriorating asset quality will loom over China’s biggest banks, analysts said, even as the nation’s biggest lenders have reported rising profits and steady bad loan ratios.
China’s biggest banks finished publishing third-quarter earnings reports on Tuesday, with earnings from Agricultural Bank of China (AgBank) (601288.SS) (1288.HK) the last of the group. It posted 55.82 billion yuan ($8 billion) in net profit, up 8.6 percent from a year earlier and above expectations.
Among the Big Five, Bank of Communications (BoCom)(601328.SS) (3328.HK) reported higher-than-expected profit growth, while Bank of China (BoC)(3988.HK) (601988.SS), China Construction Bank (CCB) (0939.HK) (601939.SS), and Industrial and Commercial Bank of China (ICBC) (601398.SS) (1398.HK) reported higher profits that were short of forecasts.
But analysts warned that the coming months should be watched carefully for signs of how bank asset quality is being impacted by the U.S.-Sino trade tensions and the struggle of smaller companies to access credit.
China’s economic growth slowed down in the third quarter to its weakest pace since the global financial crisis, in part as the government cracked down on corporate debt and risky lending practices, which have reduced sources of credit.
“Challenges in the fourth quarter mainly comprise asset quality disturbances and margin pressure,” said Guo Qiwei, a banks analyst at Huatai Securities.
“The domestic credit environment is still tightening, and the small and medium-sized enterprise defaults continue to rise,” said Guo, adding that the trade war is also putting pressure on import-export firms, which could have an impact on large lenders.
So far, the mega banks have held up better than their smaller peers, cushioned by vast deposit bases and lower funding costs.
“Next year the pressure will be bigger (on margins and asset quality) than this year,” said Zhang Ming, a bank analyst at Hua Chuang Securities.
BoC and BoCom reported unchanged non-performing loan (NPL) ratios at the end of September, compared with the earlier quarter. CCB, AgBank and ICBC said their ratios fell slightly.
“Next year the pressure will be bigger (on margins and asset quality) than this year,” said Zhang Ming, a bank sector analyst at Hua Chuang Securities.
A September report on the sector by Moody’s ratings agency warned that at-risk areas of the economy include import-export businesses, smaller property developers, local government financing vehicles and industries subject to overcapacity, where losses have been rising.
While clamping down on risky lending, the government has also sought to boost areas of the economy as growth slows, in particular aiming to boost credit to smaller companies, which provide some 80 percent of China’s urban jobs.
Analysts also see Beijing’s easing efforts as an indication that China will continue propping up bank lending.
The People’s Bank of China (PBOC) has cut the amount of cash commercial lenders must hold as reserves four times since January.
The latest reduction CNCBRR=ECI effective Oct. 15 released more than $100 billion into the financial system, the biggest net injection this year.
Two cuts were directional, encouraging banks to channel funding to SMEs and debt-to-equity swaps. The other two were partially to offset maturing loans from the medium-term lending facility (MLF) and relax funding costs, said Liang Yu, an analyst at S&P Global Ratings.
Beijing has introduced measures to ease the financing difficulties of SMEs and private firms, although many small firms say banks still set borrowing requirements that are often too stringent, making it difficult or expensive to borrow. ($1=6.9584 yuan)
(This version of the story has been refiled to fix word in headline)
Reporting by Shu Zhang in Beijing and Engen Tham in Shanghai; Editing by Neil Fullick