Banking & Finance

Bunching up

Profit growth plunges at the Big Four state banks

ICBC in paris

Still profitable, but growing slower

China’s four biggest listed banks (all state-controlled) have just posted very similar results for the first half of 2015. The message has pretty much gone out in unison too: growth in the Chinese banking sector has stagnated, at best.

Take Industrial and Commercial Bank of China (ICBC): its net profit for the six months ending in June came in at Rmb149 billion ($23 billion). That’s still respectably profitable but earnings growth at the biggest Chinese bank by assets has slowed to less than 1% on the same period in 2014.

The April-to-June figure had even dipped by 0.1% – the first year-on-year drop in quarterly profit since 2009.

Bank of China (BOC) reported the best financial results among the traditional “Big Four”, with a 1% gain in net profit to Rmb90 billion during the same six-month period.

China Construction Bank (CCB) reported a 0.9% rise to Rmb132 billion, while Agricultural Bank of China (ABC) managed to grow its bottom line by a mere 0.3%.

“In the first half of 2015, the bank proactively adapted to the economic ‘new normal’ amidst a complicated macroeconomic environment,” ICBC explained of its stagnating earnings. The phrase ‘new normal’ popped up in the financial reports of the other three banking heavyweights too.

Shortly before he stepped down from office in 2012, Premier Wen Jiabao accused the mainstream banks of making profits far too easily. Net incomes regularly rose by double-digit percentages in the past – they were up more than 60% during ICBC’s peak performance in 2007, for instance.

Bank bosses will argue that the good times are long gone. As growth slows to its weakest pace in a quarter of a century, lenders are bracing themselves for more bad loans. And since November, the central bank has cut interest rates five times to try to boost the economy, piling pressure on net interest margins.

But are the growth rates in the Big Four’s latest financials a little too similar? The bunching in results has led some analysts to raise concerns that the banks might have taken liberties in window dressing their accounts. And the same concerns apply for some of the other indicators, which don’t always paint a consistent picture of the industry’s financial health.

For example, after studying the first-half results of 11 listed banks, ratings agency Moody’s noted that the ratio of debt overdue for 90 days or more rose by 77 basis points. This was much higher than the 24 basis point increase in the ratio the banks’ actually reported for bad loans.

“Pressure on asset quality in particular, is reflected not only in the rise in headline non-performing loan ratios, but also in the less stringent recognition of such loans,” said Christine Kuo, a Moody’s Senior Vice President. “We note that an increasing amount of loans overdue for at least 90 days are not classified as non-performing loans.”

CBN, one of the better-regarded Chinese newspapers, agreed that the latest financial results might not be an accurate reflection of lenders’ asset quality.

“On the one hand lenders have to respond to the CBRC’s requirement and make prudent provisions [against bad loans]. On the other hand no one wants to be the first bank to report a profit decline,” it reported, citing the view of an unnamed analyst.

Hence the similarly reported growth figures, perhaps?

“The banks have chosen the balance point in the middle, which is no growth,” CBN claims.

A vote of confidence from investors has been lacking too. According to 21CN Business Herald, the stock market correction means that most lenders are trading below their net asset values. ICBC, for instance, is trading in Hong Kong at less than 5 times its 2014 earnings, and at 0.85 times its book value. And that’s with a dividend yield as high as 6.7%.

Investors are clearly sceptical…

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