Banking & Finance

Bank accounts

Reporting season reignites fears about the banking sector

Bitter harvest: quarterly profits dropped at Agricultural Bank of China

After a great start to the year, Hong Kong’s Hang Seng Index dropped by 3% last week, its largest weekly decline in four months.

One of the poor performers was Agricultural Bank of China (ABC). Shares in the lender fell 3.1% after it reported its first quarterly drop in profits since listing in 2010. Net income at the bank was down 14% to Rmb21.2 billion in the last quarter, from Rmb24.7 billion over the same period in the previous year.

The bank’s full year numbers were also an issue. Despite posting 29% profit growth for 2011, reaching Rmb122 billion ($19.3 billion), the market reaction was disappointment. Analysts were looking for a growth of 36%, according to the Financial Times.

The slowdown in profit at ABC also stirred concerns about the wider health of the Chinese banks. In contrast to Western banks, many of which required huge cash bailouts after the financial crisis, the Chinese lenders were called upon to do much of the bailing out, by lending aggressively when the Chinese economy started to slow three years ago.

The fear now is that the effects of all this easy credit will start to show up in their balance sheets in bad debt. A senior banking regulator said recently that the banks had started to experience an increase in non-performing loans (NPLs) in the final quarter of 2011, stemming back to the greater exposure to credit risk during the economic downturn. And industry insiders now wonder whether loans are going to start going bad just as China’s economy shows signs of slowing once more, also hitting profitability.

That means that analysts are looking for clues on credit quality. Hence the attention given to ABC’s announcement that it had put aside Rmb22.8 billion in provisions for bad debt in the last quarter, more than twice as much as the same period last year. Investors wondered how to react to the news. Was this a sign of ABC acting prudently in looking at its lending profile and preparing for a few rainy days ahead? Or did it mean that the bank feared a much more damaging deluge in coming months, when larger provisions would have to be made?

There was similar speculation about China Construction Bank (CCB), which reported its own results on Sunday. It posted a 25.5% increase in net profit to Rmb169.4 billion over the last year, citing better net interest margins, as well as rising commission and fee income.

But income in the last quarter dropped to Rmb30.2 billion, significantly lower than the Rmb42.2 billion in the quarter before.

CCB’s bad loans also rose by almost 10% in the most recent quarter, with the bank blaming worsening conditions in manufacturing, real estate and retail, reports Reuters.

The bulls will be cheered by Industrial and Commercial Bank of China, which this week reported a 17% increase in its fourth quarter earnings, beating analyst expectations, reports Bloomberg. Earning Rmb208.3 billion in the full year, the bank made Rmb44.4 billion in the last quarter.

“ICBC has extended its edge over rivals with its long- standing prudent management and better risk control,” an analyst told the newswire.

Despite the good earnings, ICBC was no different from its peers by showing cracks in its loan book. Bad loans were only slightly up, from 0.91% to 0.94%. But the bank’s target to keep NPLs below 1.2% in 2012, suggests that bank is expecting a tough year ahead.

If bad debt turns out to be larger problem for the banking industry than anticipated, all eyes will turn to how the government is going to address the issue. Currently, investors seem confident that policy remedies will be found, reports the Financial Times. This is partly evident in the strong performance of the Big Four bank stocks, which have risen by 50% since October, outperforming the general market rally.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.