Agricultural Bank's Profit Growth Falters as Bad Loans Surge

Updated on
  • Nonperforming loans increased 70 percent from a year earlier
  • Bank joins rivals in cutting dividends and loan loss buffer

Agricultural Bank of China Ltd., the nation’s third-largest lender, posted the weakest profit growth in a decade as rising bad loans dragged on earnings.

Net income rose 0.6 percent to 180.6 billion yuan ($27.9 billion) in 2015 from a year earlier, the bank reported to the Hong Kong exchange on Thursday. The profit figure compared with the 179.5 billion yuan average of 22 analyst estimates compiled by Bloomberg. Nonperforming loans jumped 70 percent to 212.9 billion yuan, it said.

Agricultural Bank is the last of China’s four largest state-controlled lenders to report earnings this week. Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. posted their weakest profit growth in at least a decade, while China Construction Bank Corp.’s net income barely increased, as the slowing economy undermined revenues and hurt their ability to pay dividends.

“The trend of rising bad loans is likely to extend into 2016,” said Zheng Chunming, a Shanghai-based analyst at Capital Securities Corp. “Banks are expected to increase write-offs of bad loans.”

Lower Returns

Agricultural Bank said it will return 54.2 billion yuan to shareholders, about 8 percent lower than in 2014. This week’s earnings reports show that the percentage of income all four big banks paid out as dividends fell last year to about 30 percent from 33 percent in 2014, as they sought to preserve capital under pressure from the highest levels of Chinese bad loans in a decade.

Against the backdrop of the slowing economy, turmoil in the stock market and government measures to curb overcapacity in manufacturing, bad debt in China’s banking industry jumped 51 percent last year to 1.27 trillion yuan, data from the bank regulator show.

Short-term corporate loans represented 67 percent of Agricultural Bank’s soured credit last year, the bank said, as its ratio of bad debt to total lending jumped to 2.39 percent from 1.54 percent. The bank expects “small increases” in soured credit this year and it has sufficient provisions to offset that, Chief Risk Officer Song Xianping said at a press briefing in Beijing.

Provisions for soured credit rose 13 percent in 2015 from a year earlier, as the company’s bad-loan coverage ratio plunged to 189.4 percent from 286.5 percent, Agricultural Bank reported. Its three largest rivals reported coverage ratios just above the regulatory minimum of 150 percent.

Declining Margins

Worsening asset quality is weighing on profits just as central bank interest-rate cuts to combat deflation put pressure on lending margins and the government deregulates finance to intensify competition. The People’s Bank of China cut interest rates six times since November 2014 and removed a cap on deposit rates in October.

Agricultural Bank’s net interest margin, a measure of profitability at its lending business, narrowed by 26 basis points to 2.66 percent last year.

The lender has the largest rural branch network among its competitors, with a third of its loans in rural areas. The bank has about 464 million retail customers and 3 million corporate clients, according to Bloomberg Intelligence.

The bank has seen changes in senior management recently, with previous Chairman Liu Shiyu moving last month to take over as head of the China Securities Regulatory Commission. China Banking Regulatory Commission Vice Chairman Zhou Mubing may succeed Liu as chairman of Agricultural Bank, people familiar with the matter said this month.

— With assistance by Aipeng Soo

Before it's here, it's on the Bloomberg Terminal. LEARN MORE