Big China Banks Cut Bad Loans as Profits Beat Forecasts

Two of China’s biggest lenders cut their bad-loan ratios as they notched improved profits in 2016, a sign that the nation’s banking industry benefited from a rebound late last year in the world’s second-biggest economy.

Earnings reports the past two days from China Construction Bank Corp. and Agricultural Bank of China Ltd., the nation’s second- and third-largest lenders by assets, both beat analysts’ estimates, helped by a drop in expenses. The country’s big banks are all releasing full-year results this week, with Industrial & Commercial Bank of China Ltd. due Thursday, and Bank of China Ltd. on Friday.

Before this week, analysts had expected the five largest lenders to report their first decline in combined annual profit since 2004. While the Construction Bank and Agbank numbers already indicate a better overall outcome, some analysts remain cautious on reading too much into the improved NPL figures, amid mixed views on whether China’s economy can sustain its fourth-quarter revival.

“The improving asset quality at banks naturally reflects the economic rebound last year,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “The rebound is probably peaking and we will likely see a worse picture in asset quality a year from now.”

Tighter Regulations

Robust consumption and a manufacturing rebound helped China’s economy grow a faster-than-estimated 6.8 percent in the fourth quarter. Still, the full-year expansion of 6.7 percent was the slowest since 1990, and economists in a Bloomberg News survey expect growth to weaken to 6.5 percent this year and 6.2 percent in 2018.

That augurs poorly for Chinese banks, which have been struggling to contain loan defaults and narrower margins amid the country’s economic slowdown in recent years. Tighter regulations on mortgage lending, off-balance sheet wealth management products and some cross-border financial services have also dragged on profits.

Shares in Construction Bank and Agricultural Bank dropped at least 0.8 percent in Hong Kong as of 1:02 p.m. local time on Thursday, compared with the benchmark Hang Seng Index’s 0.4 percent decline.

Construction Bank cut operating costs by 12 percent from a year earlier and saw its nonperforming-loan ratio fall to 1.52 percent from 1.58 percent, according to a Hong Kong exchange filing on Wednesday. Agricultural Bank slashed costs by 13 percent and its bad-loan ratio dropped to 2.37 percent from 2.39 percent, it said Tuesday.

Key 2016 numbers reported by Construction Bank versus year earlier:

• Net income 231.5 billion yuan ($33.6 billion) vs 228.1 billion yuan
• Operating expenses 172 billion yuan vs 195 billion yuan
• Net interest margin: 2.2% vs 2.63%
• Capital adequacy ratio: 15.31% vs 15.43%
• Net interest income: 417.8 billion yuan vs 457.8 billion yuan
• Net fee income: 118.5 billion yuan vs 113.5 billion yuan

For Agricultural Bank:

• Net income 183.9 billion yuan vs 180.58 billion yuan
• Operating expenses: 197 billion yuan vs 226 billion yuan
• Net interest margin: 2.25% vs 2.66%
• Capital adequacy ratio: 13.04% vs 13.4% percent
• Net interest income: 398.1 billion yuan vs 436.1 billion yuan
• Net fee income: 90.9 billion yuan vs 82.5 billion yuan

The results enthused some brokerages: China International Capital Corp. analysts raised their 2017 earnings forecasts for Construction Bank as they pointed in a report to improved asset-quality indicators and tighter liquidity conditions that would help net interest margins.

“It seems CCB’s new NPL formation peaked out in 2016 and hence future asset-quality pressure may ease,” Jefferies Group analysts led by Victor Wang said in a note.

The NPL improvements weren’t matched by smaller rival Bank of Communications Co., which posted a bad-loan ratio of 1.52 percent for 2016, up from 1.51 percent the previous year, according to its filing Tuesday.

“What’s positive to us is different nonperforming-loan indicators dropped during the period, meaning our risk control measures were efficient,” Bocom President Peng Chun told reporters in Hong Kong after his bank’s results. “What worries us is that the pressure is huge. I think for our new nonperforming loans, it’s hard to say they have peaked.”

— With assistance by Alfred Liu, and Jun Luo