China’s biggest banks posted their slowest first-quarter profit growth in at least six years as a cooling domestic economy squeezed lending margins and led to a jump in soured loans.
The results reflect the extent of the slowdown in the world’s second-largest economy which is facing its smallest rise in a quarter-century this year as China advances a goal of transforming itself from investment-led to consumption-led growth.
To counter the slowdown, China has twice cut interest rates over the past six months, in a bid to encourage lending to credit-hungry small- and medium-sized enterprises and the agricultural sector.
The rate cuts helped drive down the net interest margin – the difference between a bank’s borrowing rate and interest earned on loans – at China Construction Bank Corp (CCB) , the country’s second-largest lender by assets, to 2.72 percent from 2.8 percent in the previous quarter.
It was the first fall in the margin – a key determinant of bank profitability – in three quarters for CCB, according to results released on Wednesday.
Bank of China Ltd (BoC) , the fourth-largest lender in the country, also saw net interest margin drop to 2.22 percent from 2.25 percent in the previous quarter.
“The net interest margin is the most important variable for earnings growth for the Chinese banks,” said Jim Antos, bank analyst at Mizuho Securities Asia in Hong Kong.
Net profit for the five biggest state-controlled banks, including No. 1 Industrial and Commercial Bank of China Ltd (ICBC) , grew less than 2 percent, unthinkable a few years ago when they routinely rose in double-digits.
The slowing profit growth comes at a time when competition for banks is growing from the shadow-banking sector and full interest rate liberalization is on the cards.
But other measures by Beijing to stimulate lending may mean banks’ performances could stabilise in coming quarters, some analysts said.
In April, China lowered the amount of reserves commercial banks must keep, freeing up funds for lending. And sources told Reuters that the central bank was considering purchasing assets from commercial banks, which would inject liquidity, which was denied by the bank.
Steps like those are expected to improve the volumes and margins of banks, analysts said.
“Growth will mainly be driven from volume, from loan growth,” said Edmond Law, a banks analyst at UOB Kay Hian (Hong Kong) Ltd.
ICBC, which is also the world’s biggest bank by market value, posted its slowest net profit growth for the first-quarter in more than eight years, at 1.4 percent.
CCB and BoC both posted their slowest first-quarter net profit growth in six years, at 1.9 percent and 1 percent, respectively.
China’s banks also saw sharp rises in soured loans.
ICBC saw bad debts rise to 1.29 percent at end-March from 1.13 percent at end-December, while Agricultural Bank of China , the country’s third-largest, saw its climb to 1.65 percent from 1.54 percent over the same period, its highest in over three years.
Source: Reuters (Editing by Muralikumar Anantharaman)