Chinese Banks May See Profit Decline on Crackdown, JPMorgan Says

Chinese banks’ profits may decline in the next three years as a government crackdown on industrial overcapacity slows lending and sours loans, said JPMorgan Securities (Asia Pacific) Ltd.

Credit growth may slow to the mid-teens over the next 18 months, from the 20 percent to 25 percent gains in recent years, Josh Klaczek, head of Asia financial services, told reporters in Hong Kong today. Klaczek didn’t specify which bank could see earnings drop.

Premier Li Keqiang has pledged to curb overcapacity, which the government blames for driving down prices of goods, eroding company profits and generating pollution. Industrial & Commercial Bank of China Ltd. (601398), China Construction Bank Corp. (939), Agricultural Bank of China Ltd. (3988), and Bank of China Ltd. were among the world’s five most profitable lenders last year, data compiled by Bloomberg show.

“Growth and profits would be increasingly challenged,” Klaczek said. “Given the pressures we are seeing right now in terms of asset quality, in terms of slower revenue growth versus rising costs, and then on top of that potential interest rate liberalization, that’s a recipe for earnings falling.”

China this month eliminated the lower limit on lending rates offered by the nation’s financial institutions as Li seeks to expand the role of markets in the economy,

Social Financing

The nine mainland banks trading in Hong Kong have been reporting consecutive annual profit growth since 2009 as the nation’s stimulus program created a $2.7 trillion credit boom.

Total social financing, which includes bank loans, bond and equity sales, as well as shadow banking, was 1.04 trillion yuan ($170 billion) in June, 13 percent less than the previous month, data from the People’s Bank of China show. That compared with a 56 percent gain in January, when credit increased by 2.5 trillion yuan.

Monthly social financing may be about 1 trillion yuan for the rest of 2013, Klaczek said.

Bad loans climbed by 33.6 billion yuan in the three months ended March 31, a sixth straight quarter it increased, data from the China Banking Regulatory Commission show.

“China two years ago had way more capital than everyone else,” Klaczek said. “I no longer think it’s a case of overcapitalized. I think they are actually just at the line.”

The expansion of non-performing loans will depress profit and curb the ability of banks to increase dividends, Klaczek said. If more loans sour, lenders may need to raise capital, he said.

To contact the reporter on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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