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For banks, margin squeeze may curb profit
By Hu Xiaocen |
September 10, 2012, Monday
|
Print Edition
Print Edition
CHINESE banks, whose earnings accounted for almost a third of global banking profits last year, are showing signs of slower growth as easing monetary policy erodes margins.
Chinese commercial banks recorded combined net income of 813.3 billion yuan (US$128.2 billion) in the first six months of this year, but profit growth slowed by 13.1 percentage points to 26.3 percent from a year earlier, according to Sheng Songcheng, director-general of the Financial Survey and Statistics Development at the People's Bank of China.
He was speaking at a banking forum in Shanghai two weeks ago.
In the first half, China's "Big Five" - the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China and the Bank of Communications -- accounted for more than 50 percent of mainland banking industry profit. Still, their aggregate profit growth slowed 17.7 percentage points, worse than the pace for their smaller peers, according to interim reports.
Profit receding
Sheng said he expects growth in profit to recede further this year and into 2013, after regulators allowed lenders to offer up to 10 percent above the benchmark deposit rate for the first time in June. At the same time, a government probe into bank services charges has curbed the fees slapped on customers.
"All big five banks are offering benchmark rates for current deposits," Sheng said. "The combined deposits at the big five banks are about a quarter of total deposits in all financial institutions. Therefore, market competition is not as fierce as we expected. But, still, profit growth will tend to moderate to the level of GDP growth in the future."
The dominance of the big lenders may be shielding them from tougher market competition for the time being, but profit erosion is inevitable, Bank of Shanghai Chairman Fan Yifei told the forum. The general slowdown in the Chinese economy will also inhibit earnings growth, he said.
"Those heavily reliant on interest income for growth will be more severely impacted by the more liberal rates," Fan said. "At the same time, borrowers are tending to depend less on banks for credit as capital markets diversify. The ratio of bank credit to overall social financing plunged from 96 percent in 2002 to 42 percent in the first half of this year. The weak players will be driven out of eventually."
The property market has remained somewhat sluggish since central and local governments implemented policies to rein in home prices.
That has had a knock-on effect in sectors depending on housing sales, such as steel, cement and home appliances.
Qian Wenhui, vice president of the Bank of Communications, warned peers of the risk of bad loans at a conference earlier. He said most of the non-performing loans at his bank in the first half were related to manufacturing and retail sectors.
Other joint-stock banks more exposed to small businesses also showed an increasing number of bad loans in their interim reports.
"The asset quality of commercial banks is deteriorating as economic growth retreats," the People's Bank of China said in a commentary published on its official newspaper in August.
Bad loans surged at all lenders - both Chinese and foreign, big and small - in the second quarter, but the bad-loan ratio remained unchanged from the first quarter at 0.9 percent, the China Banking Regulatory Commission said in its latest report.
Balance sheets
However, a closer look at the balance sheets of big lenders in the first half shows resilience in the face of deteriorating asset value.
Bad loans at China Construction Bank, the nation's second biggest bank, dropped 498 million yuan from the end of last year to 70.4 billion yuan in the first six months of this year. Agricultural Bank of China performed even better. Its bad loans dropped 2.85 billion yuan to 84.5 billion yuan.
The state-owned lenders managed to maintain their non-performing loan ratio, a measure of bad loans against all loans, to about 0.9 percent, except for AgBank, whose ratio was the highest of the Big Five at 1.39 percent.
"A low non-performing loan ratio is a global phenomenon," Emmanuel Daniel, founder and chief executive officer at The Asian Banker magazine, told the forum. "I remember the time when 6 percent was normal in emerging markets. It's not that the banks have improved their asset quality; it's just that they have found ways to take risky assets off their balance sheets."
Moody's Investors Service predicts that the deterioration in bank assets is just beginning.
"Credit tightening in the real estate sector and a slowdown of land-sale revenue for local governments will further erode banks' asset quality," the ratings agency said in its latest credit outlook report. "Moreover, the midyear reports do not reflect the recent acceleration in interest rate liberalization and disintermediation, which will put pressure on net interest margins. The measures will adversely affect interest income in the coming quarters."
Chinese commercial banks recorded combined net income of 813.3 billion yuan (US$128.2 billion) in the first six months of this year, but profit growth slowed by 13.1 percentage points to 26.3 percent from a year earlier, according to Sheng Songcheng, director-general of the Financial Survey and Statistics Development at the People's Bank of China.
He was speaking at a banking forum in Shanghai two weeks ago.
In the first half, China's "Big Five" - the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China and the Bank of Communications -- accounted for more than 50 percent of mainland banking industry profit. Still, their aggregate profit growth slowed 17.7 percentage points, worse than the pace for their smaller peers, according to interim reports.
Profit receding
Sheng said he expects growth in profit to recede further this year and into 2013, after regulators allowed lenders to offer up to 10 percent above the benchmark deposit rate for the first time in June. At the same time, a government probe into bank services charges has curbed the fees slapped on customers.
"All big five banks are offering benchmark rates for current deposits," Sheng said. "The combined deposits at the big five banks are about a quarter of total deposits in all financial institutions. Therefore, market competition is not as fierce as we expected. But, still, profit growth will tend to moderate to the level of GDP growth in the future."
The dominance of the big lenders may be shielding them from tougher market competition for the time being, but profit erosion is inevitable, Bank of Shanghai Chairman Fan Yifei told the forum. The general slowdown in the Chinese economy will also inhibit earnings growth, he said.
"Those heavily reliant on interest income for growth will be more severely impacted by the more liberal rates," Fan said. "At the same time, borrowers are tending to depend less on banks for credit as capital markets diversify. The ratio of bank credit to overall social financing plunged from 96 percent in 2002 to 42 percent in the first half of this year. The weak players will be driven out of eventually."
The property market has remained somewhat sluggish since central and local governments implemented policies to rein in home prices.
That has had a knock-on effect in sectors depending on housing sales, such as steel, cement and home appliances.
Qian Wenhui, vice president of the Bank of Communications, warned peers of the risk of bad loans at a conference earlier. He said most of the non-performing loans at his bank in the first half were related to manufacturing and retail sectors.
Other joint-stock banks more exposed to small businesses also showed an increasing number of bad loans in their interim reports.
"The asset quality of commercial banks is deteriorating as economic growth retreats," the People's Bank of China said in a commentary published on its official newspaper in August.
Bad loans surged at all lenders - both Chinese and foreign, big and small - in the second quarter, but the bad-loan ratio remained unchanged from the first quarter at 0.9 percent, the China Banking Regulatory Commission said in its latest report.
Balance sheets
However, a closer look at the balance sheets of big lenders in the first half shows resilience in the face of deteriorating asset value.
Bad loans at China Construction Bank, the nation's second biggest bank, dropped 498 million yuan from the end of last year to 70.4 billion yuan in the first six months of this year. Agricultural Bank of China performed even better. Its bad loans dropped 2.85 billion yuan to 84.5 billion yuan.
The state-owned lenders managed to maintain their non-performing loan ratio, a measure of bad loans against all loans, to about 0.9 percent, except for AgBank, whose ratio was the highest of the Big Five at 1.39 percent.
"A low non-performing loan ratio is a global phenomenon," Emmanuel Daniel, founder and chief executive officer at The Asian Banker magazine, told the forum. "I remember the time when 6 percent was normal in emerging markets. It's not that the banks have improved their asset quality; it's just that they have found ways to take risky assets off their balance sheets."
Moody's Investors Service predicts that the deterioration in bank assets is just beginning.
"Credit tightening in the real estate sector and a slowdown of land-sale revenue for local governments will further erode banks' asset quality," the ratings agency said in its latest credit outlook report. "Moreover, the midyear reports do not reflect the recent acceleration in interest rate liberalization and disintermediation, which will put pressure on net interest margins. The measures will adversely affect interest income in the coming quarters."
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