BEIJING: China’s large state-owned banks are expected to disappoint when they report earnings for 2016 this week, according to analysts. Of the Big Five state-owned banks, Agricultural Bank of China is expected to post the largest profit decline, of 2 per cent, to 177.3 billion yuan (US$25.8 billion), according to a poll of 21 analysts by Bloomberg. This will mark the lender’s first earnings drop since 2010. Industrial and Commercial Bank of China, Bank of China and Bank of Communications may even have slipped into a loss. Meanwhile, China Construction Bank Corp is set to perform the best, though only scraping into growth with a 0.2 per cent rise in profit to 228.1 billion yuan. The poor performance was caused by falling interest income, which traditionally provided the bulk of the banks’ revenues.
Last year, net interest income was hit by a decline in net interest margins – the difference between the interest banks gain on their assets and the amount they have to pay out on deposits, as a proportion of their total assets. Net interest margins have been under pressure due to changes in value-added tax regulations and cuts in interest rates by the People’s Bank of China.
CLSA analyst Patricia Cheng predicted banks would reveal a decline of 11 to 21 basis points in net interest margins in the second half of 2016 from the first six months. Growth in fee and commission income should go some way to compensate for the drop in net interest income, however, and this will keep the profit declines to the low single digits. “The 2016 full-year results of Chinese banks are unlikely to provide any surprise for stable bottom line and dividend will continue to be produced,” Cheng said in a report. When it comes to asset quality, things are looking up slightly as the non-performing loan ratio of the country’s commercial banking sector fell by two basis points for the three months to December, the first quarter-on-quarter decline since early 2012. The ratio for the sector as a whole stood at 1.74 per cent at the end of 2016, according to the China Banking Regulatory Commission.
Construction Bank has been the most aggressive in trying to resolve its bad-loan difficulties, having written off or sold 53.2 billion yuan’s worth of such loans in 2016, according to calculations by analysts at Daiwa Capital Markets. This was equivalent to 30 per cent of its bad-loan balance at the end of September. The bank has also been particularly active with debt-equity swaps and replacing local government debt, which ought to help with troubled loans that have not yet become officially non-performing.
