Photographer: SeongJoon Cho/Bloomberg

China's Big Banks in 2016: Another Challenging Year on Bad Loans

  • Earnings growth may remain sluggish for the big-five banks
  • Asset quality to deteriorate as China cleans up `zombie firms'

Lower interest rates, rising bad loans and a growing challenge from Internet finance companies will add up to another tough year for China’s biggest banks in 2016, with their profit growth set to pick up only marginally from the slowest pace in more than a decade in 2015. Here are five snapshots.

No end is in sight for increases in nonperforming loans. Going by the official numbers, which are widely regarded as understated, bad loans rose to a seven-year high of 1.2 trillion yuan ($184 billion) as of the end of September. In a sign of the write-offs to come, policy makers are aiming for a clean-up of “zombie companies” that rely on government subsidies and bank loans to keep operating. Xuanlai He, an analyst at Commerzbank AG, is among those forecasting a worsening of asset quality in 2016.

Increases in bank loans have moderated from the blow-out during the global financial crisis. China’s credit growth -- including loans plus other forms of financing -- will ease to 13 percent in 2016 from about 14 percent last year as the economy slows and bad loans encourage caution, according to an estimate from Fitch Ratings.

Banks’ net interest margins are shrinking as the central bank keeps rates low. Analysts are forecasting more cuts in benchmark rates by the People’s Bank of China in 2016, moves that would add to the pressure on margins caused by interest-rate deregulation and competition for deposits from Internet finance firms.

While the profits of China’s biggest banks are enormous -- four rank in the world’s top 10 companies by net income -- don’t expect those numbers to get much bigger this year. The nation’s five largest banks may report combined profit of 936 billion yuan ($144 billion) in 2016, an increase of 1.4 percent from a year earlier, according to analysts’ estimates in a Bloomberg survey. Earnings will be capped by the nation’s economic slowdown, bad debts and shrinking margins.

Meanwhile, the pressure on banks from a wave of new technology-driven entrants to the finance industry, such as peer-to-peer lenders, will only get bigger. While estimated P2P transactions of 800 billion yuan in 2015 only accounted for a sliver of the nation’s financing, the amount is more than double the total for 2014.