Industrial & Commercial Bank of China Ltd. and its three largest rivals are poised to report the slowest profit growth since the 2008 financial crisis amid surging bad loans and more competition for deposits.
ICBC, China Construction Bank (939) Corp., Agricultural Bank of China Ltd. (601288) and Bank of China Ltd. (3988) will probably report combined net income next week of 791 billion yuan ($127 billion) for 2013, 11 percent more than the previous year, according to analyst estimates in a Bloomberg survey. The growth may slow to 7 percent this year, compared with a 17 percent increase forecast for the four largest U.S. and European banks.
Shares of the Chinese banks are trading at record-low valuations as concerns mount over the inability of companies including property developers to repay debt in an economy that had its first onshore bond default two weeks ago. Competition for the state-owned banks is set to increase as China’s government loosens interest-rate controls and opens the industry to more privately owned lenders.
“Investors are focused on a number of overhangs that are not likely to be resolved in the next one or two years,” said Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia. China’s slowing economy “gives even less support to bank share prices.”
ICBC (1398), the biggest Chinese lender by assets, may say March 27 its 2013 net income climbed 9.5 percent to 261.2 billion yuan, allowing it to retain its spot as the world’s most profitable bank, according to a survey of 28 analysts.
Agricultural Bank, China’s third largest, will probably report a 14 percent gain in annual profit on March 25. Bank of China’s earnings, due March 26, may have risen 8.5 percent, while Construction Bank, the nation’s second biggest, may post growth of 11 percent on March 30.
Press officers at ICBC and Construction Bank declined to comment on earnings, while spokesmen at Agricultural Bank (1288) and Bank of China didn’t respond to requests for comment. All four of the banks are based in Beijing.
JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), HSBC Holdings Plc (HSBA) and Bank of America Corp. (BAC) may earn a combined $78.9 billion this year, according to estimates compiled by Bloomberg.
Part of the Chinese government’s changes to the financial industry include ending an interest-rate system that buoyed profits at the biggest lenders by creating a margin of about 3 percent between what they paid for one-year deposits and charged for loans. The central bank scrapped a floor on lending rates last July and intends to remove a cap on deposit rates in one to two years, Governor Zhou Xiaochuan said March 11.
ICBC’s net interest margin, a measure of lending profitability, may have narrowed to 2.59 percent last year from 2.66 percent a year earlier, while Construction Bank’s contracted 2 basis points to 2.73 percent, Barclays Plc estimated.
The government is also reining in a credit boom -- engineered to bolster the economy after the 2008 financial crisis -- that fueled overcapacity in some industries and inflated borrowings by local governments. Growth in local-currency loans slowed last year to 14.1 percent, the least since 2005, from 15 percent in 2012, People’s Bank of China data show.
“China’s resolution to reform its economy will inflict a lot of pain on its banking system,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co. “The growth model of depending on loan expansion and government-protected margins will be seriously challenged.”
The average interest rate on bank loans fell 16 basis points this quarter from the previous period to 6.33 percent, while the rate on non-bank loans rose 26 basis points to 8.39 percent, according to the China Beige Book, a private survey published by New York-based CBB International. That’s the widest spread in a year, according to the survey.
Banks are facing increasing competition for deposits after the PBOC engineered a cash crunch last year to curb off-balance sheet financing that evolved to circumvent official credit curbs. Credit extended through so-called shadow banking amounted to $7.6 trillion as of September, Zhu Haibin, a Hong Kong-based economist at JPMorgan, estimated in January.
Alibaba Group Holding Ltd. lured more than 250 billion yuan to its smartphone-driven Yu’E Bao Internet investing platform from banks by offering higher returns and convenience. China’s banking regulator said March 11 it will allow five privately owned banks to be set up under a trial aimed at reducing the largest lenders’ dominance over the industry.
The four biggest banks controlled 50.8 percent of the country’s yuan-denominated household savings as of Jan. 31, down from 55 percent in 2012, according to central bank data.
Shares of ICBC and its three biggest rivals slumped by an average 17 percent this year in Hong Kong, compared with the benchmark Hang Seng Index’s 8.9 percent drop. The lenders are trading at an average of 4.4 times their estimated 2014 earnings, the lowest on record, data compiled by Bloomberg show.
“Stocks have been oversold, but will likely get more investor attention once the currency and economy start to rebound,” said Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong.
China’s economy, the world’s second largest, is forecast to grow 7.4 percent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg News survey. The State Council, or cabinet, said this week it will speed up construction projects and other measures to support the economy.
Nonperforming loans for Chinese banks increased for nine straight quarters to 592.1 billion yuan at the end of December, the highest since September 2008. Guotai Junan’s Cao said the industry’s bad-loan ratio may rise to 1.3 percent by the end of 2014 from 1 percent in 2013. That would be the highest since June 2010, China Banking Regulatory Commission data show.
Compounding concerns over banks’ earnings are worries over lending to property developers following the collapse of Zhejiang Xingrun Real Estate Co. this week. Its creditors include more than 15 banks, with Construction Bank holding more than 1 billion yuan of debt, according to people familiar with the matter.
Construction Bank is closely following the situation, a Beijing-based press officer said, declining to comment further. The nonperforming-loan ratio of the bank’s lending to developers was 0.74 percent, compared with 1.4 percent for all corporate borrowings, according to its first-half profit report.
Loans to developers accounted for an average 3.4 percent of assets held by publicly traded banks as of June 30, China International Capital Corp. estimated last month.
“We believe there will be further defaults in this industry, but they will be limited to smaller companies like Zhejiang Xingrun,” Fitch Ratings said in a note on March 18. “Further defaults may result in onshore banks becoming more selective when lending to this sector.”
Zhejiang Xingrun’s collapse came after Shanghai Chaori Solar Energy Science & Technology Co., a solar-cell maker, became the country’s first company to default on onshore bonds when it failed to make a full coupon payment on March 7.
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