China’s Big Banks Beat Profit Estimates as Bad Loans Curbed

  • Quarterly earnings from ICBC, rivals beat analyst estimates
  • Shares fall as investors take profit following recent rally

Inside China's Big Four Banks' Earnings

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Resilient economic growth and a government campaign against excessive leverage are helping China’s largest banks, curbing their bad loans and underpinning their net interest margins.

Those factors helped the four biggest banks post higher-than-estimated second-quarter net income, led by Bank of China Ltd.’s 23 percent surge, the biggest increase in six years. Bigger rivals Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd. posted an average gain of 3.5 percent, according to figures derived from first-half earnings reported to Hong Kong’s exchange on Wednesday.

Their shares fell in Hong Kong as investors locked in profits from the stocks’ rally since early July, brokers said. ICBC dropped 2.3 percent as of 10:15 a.m. local time, while its three rivals lost at least 1 percent.

“Investors had been betting on them beating estimates, ” said Andrew Clarke, director of trading at Mirabaud Asia Ltd. “They have, so there’s an initial sell off as investors lock in gains. There will be buyers coming in on the back of research upgrades.”

China’s economic recovery has bolstered the firms, which control about a third of the nation’s $36 trillion of banking assets. What’s more, as interbank lenders, their interest margins have benefited from the government’s campaign against financial leverage, which has driven up the rates that banks pay to borrow from each other.

“Improvement in margin is the highlight for our results in the first half,” Zhang Qingsong, a Bank of China vice president, said at a media briefing in Beijing. “It’s a reflection of better economic conditions as well as our own efforts to improve the mix of assets.”

Here are the banks’ second-quarter net income numbers:

  • Bank of China: 57.04 billion yuan ($8.7 billion) versus 46.42 billion yuan
  • ICBC: 77.2 billion yuan versus year earlier 75.45 billion yuan
  • AgBank: 52.9 billion yuan versus 50.46 billion yuan
  • CCB: 68.33 billion yuan versus 65.99 billion yuan

The government’s develeraging efforts, renewed in earnest since the start of April, have sought to curb shadow financing and unravel the complex web of ties between Chinese lenders.

Read more: China is taking on its mountain of debt

Interbank leverage fell in the first half of 2017 for the first time in seven years, while the value of wealth-management products, a key form of off-balance sheet financing, slumped in May by the most in a decade.

Meanwhile, demand for traditional loans increased. Banks advanced a record 8.2 trillion yuan of new lending in the first half, 12 percent more than a year earlier, central bank data show.

Unlike smaller lenders, which often rely on short-term borrowings from other financial institutions, the Big Four together control 40 percent of Chinese deposits, thanks to their extensive branch networks and hundreds of millions of retail customers. That’s enabled them to provide liquidity on the interbank market, where borrowing costs have surged to the highest in two years.

Bank of China’s net interest margin expanded to 1.88 percent in the second quarter from 1.8 percent in the first quarter. ICBC’s NIM was 2.16 percent at the end of the first half from 2.12 percent in March, while CCB’s margin rose to 2.14 percent from 2.13 percent. By contrast, smaller banks such as Bank of Ningbo Co. have reported sharp contractions.

Bets that earnings of the big banks will withstand the develeraging campaign have helped their stock prices outperform smaller rivals since March. Shares of the Big Four last traded at an average of 0.8 times their estimated book value in Hong Kong, compared with a low of about 0.68 times six months ago.

“There’s a flight to safety attitude here,” Andrew Collier, managing director of Orient Capital Research, said in a Bloomberg TV interview in Hong Kong on Wednesday. “Go to the big banks, they’ve got captured deposits from everybody across China, they’ve got less of the shadow-banking junk on their balance sheets and so people have figured that’s the safer bet.”

Growth in China’s economy, which expanded a faster-than-expected 6.9 percent in the second quarter, has bolstered the country’s banks. Data from the banking regulator this month showed that industry profits rose 7.9 percent in the first half from a year earlier, while the nonperforming-loan ratio at China’s commercial banks has remained unchanged for three straight quarters at 1.74 percent.

Bank of China boosted its profit in the second quarter by booking significantly lower charges to cover losses from bad loans. Impairment charges in the period amounted to 4.7 billion yuan from about 34 billion yuan a year earlier.

A breakdown of the NPL ratios reported by the big banks:

  • Bank of China: Fell to 1.38% in June from 1.46% in December
  • ICBC: Declined to 1.57% from 1.62%
  • AgBank: Dropped to 2.19% from 2.37%
  • CCB: Fell to 1.51% from 1.52%

— With assistance by Jun Luo, Alfred Liu, Heng Xie, and Dingmin Zhang

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