China’s Big State-Owned Banks Saw Rising Defaults, Shrinking Loan Profitability In 2012

 @moranzhang
on March 28 2013 5:50 AM
Bank of China
A paramilitary policeman stands guard outside the headquarters of the Bank of China in central Beijing. Reuters

SHANGHAI, China -- China's five major state-owned banks all reported their weakest annual profit growth in years this week, as a slowing domestic economy prompted lenders to set aside more provisions to protect against future bad loans, while a more relaxed interest-rate regime is putting pressure on lenders' net interest margin -- a primary gauge of their lending profitability.

Chinese banks have been used to fat margins between lending and deposit rates, but the government has been narrowing the difference. In the middle of last year, the central bank expanded the range that banks' deposit and lending rates can float around benchmark levels. The liberalization of China’s interest rate policies means banks need to set higher deposit rates to compete for savers, and can lend at lower rates.

China Construction Bank Corporation (HKG: 0939) was the first among the “Big Five” to report 2012 earnings. The others are Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China and Bank of Communications.

Last Sunday, China Construction Bank said its net profit rose 14 percent to 193.2 billion yuan ($31.1 billion) in 2012, from 169.3 billion a year earlier. That was the slowest profit growth since 2006.

The country's No. 2 lender by assets said net-interest income was up 16 percent to 353.2 billion yuan from 304.57 billion yuan, and net-fee and commission income rose 7.5 percent to 93.51 billion yuan.

China Construction Bank was joined by Agricultural Bank Of China Limited (HKG: 1288) and Bank of China (HKG: 3988), which reported on Tuesday their slowest annual profit growth since they went public.

Agricultural Bank of China, the country's No. 3 lender, said it recorded a 19 percent increase in 2012 net profit to 145.09 billion yuan, up from 121.93 billion yuan a year earlier. The agricultural lender's profit growth was the slowest since 2010, when it listed in Hong Kong, according to previous filings.

Agricultural Bank of China's net income margin fell to 2.81 percent as of Dec. 31 last year, from 2.85 percent a year earlier.

Bank of China, the country's No. 4 lender, said its net profit rose 12.2 percent from a year earlier -- the slowest pace since 2006 -- to 139.4 billion yuan in 2012. The bank’s net interest-margin was 2.15 percent as of Dec. 31 last year, compared with 2.12 percent a year earlier.

Industrial and Commercial Bank of China (HKG: 1398), the world's largest bank by total assets, warned on Wednesday about challenges that Chinese banks will face in 2013. In an annual results statement released on Wednesday, Industrial and Commercial Bank of China said it gained a net profit of 238.7 billion yuan last year. That’s 14.5 percent higher compared with the year before, but the slowest rate since the bank went public in 2006. In the first two months of 2013, the bank's net interest margin declined by 4 basis points, signaling a continuous fall through this year. Like its peers, Bank of Communications Corp. (HK: 3328), also notched its slowest full-year profit growth in years.

China's fifth-largest lender by assets said its net profit for the twelve months ended Dec. 31 rose 15 percent to 58.37 billion yuan from 50.74 billion yuan a year earlier. That’s the slowest growth since 2009.

In 2012, Bank of Communications’ net interest margin fell to 2.59 percent from 2.61 percent.

Bad Loans

The change to interest rates is just one of a number of challenges facing big state-run Chinese banks.

China's economy expanded 7.8 percent in 2012, its slowest pace for 13 years. The cooling growth has raised expectations that the banks may see a spike in bad loans, largely stemming from a 4 trillion yuan stimulus package in 2009 and over-investment in the real estate and infrastructure sectors.

The China Banking Regulatory Commission said earlier this month that Chinese banks have reported a fifth consecutive quarterly rise in the value of their bad loans. Bad loans rose by 64.7 billion yuan to stand at 492.9 billion yuan at the end of 2012.

Bad loans have mostly been concentrated in the Yangtze River Delta, which includes Shanghai and the export-oriented city of Wenzhou. The region is known as the hub for small and medium-size manufacturers and exporters, which took a hit from a slowing economy and fragile global market conditions.

Overdue loans, an indicator for future bad loans, rose at all five banks as of Dec. 31 last year.

Overdue loans rose by 20.08 billion yuan to 77.08 billion yuan by the end of last year, accounting for 1.03 percent of China Construction Bank’s total loans extended in 2012, up from 0.88 percent by the end of 2011, the bank said. The bank raised its provisions by 29.85 percentage points to 271.29 percent last year, according to its annual report.

Meanwhile, overdue loans at the Agricultural Bank of China totaled 87.91 billion yuan, accounting for 1.4 percent of total loans extended in 2012, up from 1.3 percent in 2011. Bank of China's overdue loans totaled 74.90 billion yuan, up from 68.130 billion yuan in 2011.

Industrial and Commercial Bank of China’s overdue loans rose to 62.1 billion yuan, although they accounted for 0.71 percent of total loans it extended last year, down from 0.74 percent in 2011. Overdue loans at Bank of Communications increased by 34.3 percent to 20.45 billion.

While most analysts don’t expect an imminent banking crisis in China, rising defaults and shrinking loan profitability are serious threats to the country’s banking system.

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