China’s banks face earnings squeeze due to rate reform, downturn

By Reuters On Aug 29, 2019

FILE PHOTO: People walk past a branch of Industrial and Commercial Bank of China (ICBC) in Beijing, China April 1, 2019. REUTERS/Florence Lo

By Cheng Leng and Engen Tham

BEIJING/SHANGHAI (Reuters) – Chinese banks will face pressure on earnings and asset quality in the second half of 2019 as interest rate reforms squeeze margins and a Chinese-U.S. trade war adds to economic uncertainty.

But results from three of the nation’s top listed banks, all of which reported a first-half profit rise of nearly 5%, showed most pressure is being felt by smaller lenders, which have struggled with a liquidity crunch.

Three regional lenders have been bailed out by Beijing so far this year.

“The trade war causes uncertainty, and there is downward pressure on the economy,” Gu Shu, the president of the world’s largest commercial lender Industrial and Commercial Bank of China (ICBC) (HK:1398) (SS:601398), told a news conference.

ICBC, the third of China’s top five state-owned listed banks to post half-year results, reported a 4.7% rise in profit.

“We expect margin pressure in the second half of the year,” said Ray Heung, senior vice president of the Financial Institutions Group at Moody’s Investors Service.

He said a government drive to encourage banks to lower lending rates, including through its reform of the loan prime rate (LPR), was one factor putting pressure on earnings.

A second factor squeezing margins was that “deposit competition won’t ease,” Heung added.

ICBC’s president said LPR reform would only have a limited impact on his bank’s net interest income, adding that about 48% of ICBC’s new loans in the first half referenced that rate.

But ICBC’s results still showed it faced a squeeze, posting a fall in net interest margin, a key gauge of profitability, from 2.31% at the end of March to 2.29% at end of June.

Bank of Communications (BoCom) (SS:601328), which reported a 4.9% rise in first-half net profit earlier this week, said asset quality at commercial banks faced challenges.

China Construction Bank Corp (CCB) (SS:601939), another of the top fie, also reported a net profit rise of 4.9 percent for the first six months.

But both banks also reported a drop in net interest margin.

Smaller Chinese banks have been facing liquidity issues and mounting risks, with large state banks stepping in.

ICBC said it was making a 30 billion yuan investment to take a 10.82% stake in Bank of Jinzhou. CCB took charge of a take over of Baoshang Bank.

“The main challenge is how to maintain asset quality as the macro economy slows,” CICC analyst Victor Wang said about the outlook for banks in the second half of the year.

By the end of the three months to June, the non-performing loan ratio for China’s banking sector reached 1.81%, the highest since 2009, data from the China Insurance and Banking Regulatory Commission showed.

ICBC’s non-performing loan (NPL) ratio was 1.48% at end of June compared with 1.51% at the end of March. BoCom and CCB also reported steady or falling NPL ratios.