By Shu Zhang and Engen Tham
BEIJING/SHANGHAI (Reuters) – Chinese banks are set to quicken the pace of bad loan disposals this year, likely raising more capital and taking advantage of relaxed provisioning rules as they look to lift what is expected to be a modest year of earnings growth in 2017.
Among those due to report annual earnings next week are Industrial and Commercial Bank of China (ICBC), China Construction Bank <601939.SS><0939.HK>, Agricultural Bank of China (AgBank) <601288.SS><1288.HK>, and Bank of China (BoC)<601988.SS><3988.HK>.
Annual profits for the 12-months to Dec. 31 are expected to have risen between 2.4 percent to 4.9 percent for China’s biggest four banks, according to analysts surveyed by Thomson Reuters, helped by steadying interest margins. In 2016, net profit at four of China’s top five banks grew by less than two percent.
A broad crackdown on financial risks, including past policy tightening, and a nationwide deleveraging campaign have prompted many banks to focus on improving asset quality. And as the cost of funds ease, the outlook for banks appears more promising.
“In general profit growth for the banking sector in 2017 was modest, but the pace of growth is expected to accelerate on falling cost of loans and widening interest margins,” said Jaclyn Wang, an analyst with BOCOM International.
China’s total new loans hit a record 13.53 trillion yuan ($2.14 trillion) in 2017, and expectations are for another solid year of lending growth despite a slight slowdown forecast for the economy. The credit boom has been fueled by strong economic growth, while a clampdown on riskier shadow lending has forced banks to shift some loans back onto their balance sheets.
Net interest margins (NIM) already appear “to be bottoming out for large banks” Nomura analysts said in a recent note, forecasting NIM to expand by 5 basis points year-on-year to 2.18 percent in 2018, contributing to 9 percent growth in pre-provision operating profit.
Beijing’s drive to boost domestic consumption is seen keeping household loan demand strong. Commercial banks’ non-performing loan ratio has steadied to 1.74 percent by end-2017, from around 1.76 percent in the third quarter of 2016.
Capital raising and the continued clean-up of bad loans will be a key focus for investors.
Many of the banks will need the fresh capital to keep their capital buffers within regulatory limits as they bring off-balance sheet lending onto their books, as part of Beijing’s extended crackdown on financial risks and shadow banking activity.
So far this year mainland listed Chinese banks have announced around 400 billion yuan ($63.34 billion) worth of private and public fundraising plans, according to Reuters analysis of company filings.
Fourteen banks – mostly city and rural commercial banks – are queuing for initial public offerings in Shanghai and Shenzhen stock markets, a Reuters analysis of regulatory disclosure shows.
AgBank, the country’s third largest lender, kicked off banks’ recapitalization this year by announcing a 100 billion yuan fundraising plan – the largest A-share private placement by a Chinese bank.
While AgBank’s capital cushion lagged that of its Big Four rivals, all currently hold capital that exceeds the regulatory minimum levels.
One factor likely to ease pressure on banks is the recent relaxation of bad-loan buffer rules.
Earlier this month, regulators cut the reserves commercial banks must hold against bad loans from 150 percent to as low as 120 percent – the exact rate will be partly dependent on how quickly banks shed their bad loans.
Soured debt in the commercial banking sector totaled 1.7 trillion yuan ($268.5 billion) by end-2017, the highest in 12 years, official data show.
Should provisions be cut to 120 percent, banks’ collective net profit could increase by 1 trillion yuan, or 57 percent from 2017 levels, according to estimates by analysts at Guotai Junan Securities. “Loan re-pricing and stabilized impairment charges will help ease pressure on profitability for big banks this year,” said Yulia Wan, an analyst at Moody’s.
(Reporting By Shu Zhang in BEIJING and Engen Tham in SHANGHAI; Additional reporting by Shanghai newsroom; Editing by Shri Navaratnam)