Profit growth has slowed in recent years while the sector tackles
its greatest challenge since the global financial crisis, with bad
loans at a 10 year high while funds set aside to cover the losses
fall close to regulatory limits.
While banks ramped up lending during a government stimulus drive
during the meltdown, much of that lending went to industries where
rapid expansion developed into over-supply as economic growth
tapered, raising the risk of default and dragging on profits.
For 2015, analysts estimate net profit at the Big Four to range from
1 percent growth to 1 percent decline, showed Reuters calculations
based on data from Starmine SmartEstimate.
Bank of Communications Co Ltd, China's fifth-biggest lender, reports
earnings on Tuesday, followed on Wednesday by Industrial and
Commercial Bank of China Ltd (ICBC) and Bank of China Ltd (BOC).
China Construction Bank Corp and Agricultural Bank of China Ltd
report on Thursday.
Fitch Ratings, in a research note on March 22, said banks are likely
to announce "continued subdued earnings growth amid margin
compression and asset deterioration."
Six cuts in the central bank's benchmark interest rate over 17
months has narrowed lenders' net interest margins - or the
difference between interest earned on loans and funds extended.
Analysts expect slow economic growth and reforms to prompt more
SURGING BAD DEBT
Non-performing loans (NPLs) reached a 10 year high of 1.27 trillion
yuan ($195 billion) last year, or 1.67 percent of all loans
outstanding as of December, showed data from the China Banking
However, analysts said some banks appear to be delaying recognizing
some loans as soured. The potential real bad loan ratio may be 8
percent to 9 percent, banking analyst Li Nan at Beijing Gao Hua
Securities wrote in a recent report.
Hinting at the extent of the problem, the regulator has issued a
series of notices in recent weeks highlighting the risk of debt
extended to industries suffering over-capacity, and advising banks
to quickly dispense of bad loans.
The central bank is also preparing to let banks accept
debt-for-equity swaps to lower leverage in the corporate sector.
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Last week, shareholders of shipbuilder-turned-oil explorer China
Huarong Energy Co Ltd voted overwhelmingly in favor to swap $2.7
billion in debt for equity, in what would be a test case for the new
"This is a way to avoid an explosion of non-performing loans," said
a senior Big Four banker, who was not authorized to speak publicly
on the matter and so declined to be identified.
"When a loan is converted to equity, it increases efficiency, (by)
taking it off the balance sheet."
Chinese banks are required to set aside funds equivalent to at least
150 percent of bad loans to cover losses. That loan loss provision
for the sector as a whole was 181 percent at the end of last year.
But, at September-end, it was as low as 153.7 percent at BOC and
157.6 percent at ICBC.
Banks have been lobbying for a lower minimum provision ratio to free
"Everyone knows banks are having a tough time. But there is also an
easy way to boost profits immediately - lowering provisioning
requirements," said a Big Four banker.
Seven lenders may have received permission to lower loan loss
provision ratios, financial magazine Caixin reported last week
citing unidentified sources.
(Reporting by Shu Zhang and Matthew Miller; Additional reporting by
Engen Tham; Editing by Christopher Cushing)
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