Banking sector sees defaults rise, weak profit growth as economy slows down

Industrial and Commercial Bank of China Ltd, the world's largest bank by market value, secured its position as the most profitable bank globally by earning 680 million yuan ($107 million) a day in the first half of the year.

An Industrial and Commercial Bank of China Ltd branch in Sanmenxia, Henan Province. [Photo/China Daily]

In an interim statement released on Thursday, the lender said it registered a net profit of 123.2 billion yuan in the first half, up 12.5 percent from a year ago.

But the profit growth pace was the weakest in recent years, and compares unfavorably with the 29 percent growth rate in the same period last year. Meanwhile, defaults also rose as the economy continues to slow down.

The lender's outstanding non-performing loans reached 75.1 billion yuan, up 2.1 billion yuan compared with six months ago.

Apart from Bank of China Ltd - which registered the slowest earnings growth pace among China's Big Four lenders with less than 7 percent - ICBC is the only lender in that club that reported an increase in NPLs.

"But actually the figures are much better than our estimates at the beginning of the year," said Jiang Jianqing, ICBC chairman.

He said that special-mention loans, a reference to debt that could potentially turn sour, represent nearly 3 percent of total loans, down 3 basis points from the beginning of the year. Such loans declined 8 billion yuan compared with the previous quarter.

Overdue loans, an indicator of future NPLs, are at almost the same level as they were at the beginning of the year, Jiang said.

The bank's NPL ratio declined 0.05 percentage point from the beginning of the year to 0.89 percent.

ICBC also said its net interest margin, a primary measure of banks' profitability from lending, improved to 2.66 percent from 2.6 percent at the end of 2011.

Net interest income, which took up more than 70 percent of its operating income, increased 17 percent, while fee income rose 1.9 percent.

Affected by the economic slowdown and weaker borrowing demand, ICBC's major rivals in the country, such as BOC and China Construction Bank Corp, all showed declining profit growth in the second quarter.

Moody's warning

Meanwhile, Moody's Investors Service said in a report released on Thursday that Chinese banks' deteriorating asset quality and slowing profit growth are credit negative.

Although NPLs for BOC and CCB were stable, most other banks, particularly smaller ones, reported some degree of asset deterioration. Ping An Bank Co Ltd even reported a 51 percent jump in NPLs.

"There is also evidence of higher NPLs in the pipeline," said Hu Bin, Moody's vice-president and senior analyst.

Hu added that special-mention loans and delinquent loans - defined as a loan with principal repayment or interest payment overdue at least one day - are also on the rise.

The weakening asset quality and profit growth reflect China's softening economy, but do not take into account several other challenges banks face, Moody's said.

"Banks have generally attributed worsening asset quality to slowing domestic and overseas demand that has affected the manufacturing sector, SMEs and eastern coastal areas. However, we also see persistent credit tightening in the real estate sector and a slowdown of land-sale revenue for local governments as factors that will further erode banks' asset quality, and believe the deterioration trend is just beginning," the report said.

Moreover, the results do not reflect the recent acceleration in interest rate liberalization and disintermediation, which would adversely affect banks' interest income in coming quarters, it added.

Standard & Poor's Ratings Services said on Tuesday that it had assigned its A long-term counterparty credit rating to ICBC, three notches higher than the bank's BBB stand-alone credit profile, given the lender's strong customer deposit base, strong liquidity ratios, and "very high" likelihood of extraordinary government support in a distress scenario.

The outlook on the long-term rating is stable.

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