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Trade tensions cast shadow as China's top banks post higher profits

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Trade tensions cast shadow as China's top banks post higher profits
FILE PHOTO: A man walks past the headquarters of Agricultural Bank of China in Beijing, China March 28, 2017. REUTERS/Jason Lee/File Photo   -   Copyright  Jason Lee(Reuters)
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By Shu Zhang and Engen Tham

BEIJING (Reuters) – Agricultural Bank of China (AgBank) <601288.SS>, the country’s third-largest lender, said its asset quality is expected to stabilize but mounting trade tensions are a threat to the global economy, after posting higher half-yearly profits.

AgBank <1288.HK> was the first of the so called Big Four state lenders to report interim results on Tuesday. Its earnings and that of China Construction Bank Corp (CCB) <601939.SS> and Bank of China Ltd (BoC) <601988.SS> were underpinned by steady or improved margins and bad loan ratios.

Their stronger earnings come at a time when China is pumping funds into the banking system and rolling out support measures for local businesses to cushion the impact from an escalating trade war with the United States.

But analysts fear an unrestrained, credit-fuelled growth, could stoke a build-up in bad loans as the Chinese economy cools partly due to the trade conflict, undermining Beijing’s push to reduce riskier lending and a mountain of debt

Trade friction started by “some country” is threatening global economic stability, AgBank President Zhao Huan told a news conference on Wednesday, without naming the United States.

The bank needs to make provisions to prepare for trade friction and zombie firm failures, he said.

The trade conflict between Beijing and Washington escalated last week as they heaped more tariffs on each other’s goods. Since early July, they have imposed tariffs on a combined $100 billion worth of each country’s goods.

“The results of the top four banks are not enough for investors to regain confidence in the broader banking sector because the economy is going to slow in the second half,” said Steven Leung, Hong Kong-based sales director, UOB Kay Hian.

“The Big Four banks mostly lend to the local government bodies and government-linked enterprises, so they will be able to manage the bad debt situation. But that’s not true for the entire banking sector.”


At end-June, the non-performing loan (NPL) ratio for the banking sector was 1.86 percent, data from the China Banking and Insurance Regulatory Commission shows, the highest since 2009.

In stark contrast, AgBank, BoC, and CCB posted steady NPL ratios for the first half as their diverse revenue sources and strong capital buffers gave them an edge over smaller peers which have been hit hard by a government crackdown on risk.

Agbank will conduct review of its overdue corporate loans in the second half, Zhao said, adding asset quality was expected to stabilise and improve for the remaining part of the year.

Net profit for AgBank rose 7 percent in the six months ended June from a year earlier to 115.8 billion yuan ($16.85 billion). BoC saw a 5 percent rise in profit to 109.1 billion yuan, while CCB netted a 6 percent rise, raking in 147.0 billion yuan.

Results for AgBank and BoC were aided by higher net interest margins (NIM), the difference between interest paid and earned – a key gauge of profitability for lenders.

But CCB and AgBank are likely to see their NIM come under pressure in the second half amid easier access to cash, said BoCom International in Wednesday research notes.

Bank of Communications Co Ltd <601328.SS>, the country’s No.5 listed bank by assets, reported higher profits and improvement in bad debt ratio last week.

Analysts, however, flagged concerns about the unexpectedly slow deposit growth in the banking sector.

“Growth of deposits has been bad not only for joint stock banks and city commercial lenders, but it hasn’t been great for the big ones either,” said Zhang Ming, a banks analyst at Huachuang Securities.

($1 = 6.8740 Chinese yuan)

(Additional reporting by Sumeet Chatterjee in Hong Kong; Editing by Himani Sarkar and Mark Potter)

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