China | Big banks stage profit comeback as bad loans recede

Three of China’s largest banks posted better-than-expected profit growth in 2017 as a strengthening economy curbed soured loans and the government’s campaign to cut debt boosted their lending margins.

Industrial & Commercial Bank of China Ltd. yesterday reported a 3 percent increase in net income last year, while Agricultural Bank of China Ltd. on Monday posted a 5 percent gain. China Construction Bank Corp., which also reported earnings yesterday, said its net profit rose 4.7 percent. All three lenders beat analysts’ estimates.

China’s top five banks, which control more than a third of the nation’s USD40 trillion in banking assets, are staging a comeback thanks to improvements in borrowers’ repayment ability and higher demand for loans. They are also benefiting from President Xi Jinping’s crackdown on excessive debt, which is forcing smaller banks to turn to big lenders to borrow money.

ICBC’s net interest margin widened by 6 basis points while the spread expanded by 3 basis points at AgBank. Both banks’ nonperforming loan ratios dropped for the first time since at least 2013, and senior executives said at press conferences that they expect the benign asset quality trend to continue.

“The major non-performing loan indicators last year showed both the present and the future trend significantly improved,” ICBC Chairman Yi Huiman told reporters at a briefing in Hong Kong. “That shows that our credit policy since 2013 is effective.”

Together with China Construction Bank Corp., Bank of China Ltd. and Bank of Communications Co., combined profits at the Big Five probably grew about 3 percent last year, the fastest expansion since 2014, according to analysts’ estimates. That’s projected to pick up to about 8 percent in 2018 as rising global interest rates boost margins.

Their results are partly flattered by a poor 2015 and 2016, when concerns intensified about rising bad loans across China’s financial sector. Asset quality has since improved as economic growth accelerated in 2017 for the first time in seven years. Another sign of optimism emerged this month, when the regulator was said to have lowered bad-loan provisions to a minimum 120 percent from the previous 150 percent, freeing up more cash for lending.

Shares of ICBC have climbed 8 percent this year while AgBank surged more than 24 percent, outperforming the 3 percent gain in the benchmark Hang Seng Index. Still, Hong Kong-listed Chinese banks are trading at an average 0.75 times their forecast book value.

ICBC’s bad-loan coverage ratio, which measures provisions against soured credit, climbed to 154 percent by December. At AgBank, the buffer surged to 208 percent. Bloomberg