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Lower profits likely at major Chinese banks

By Yang Zhen and Zhou Yan (China Daily)
Updated: 2009-03-24 07:56

A pedestrian walks past a Bank of China branch in Shanghai. [Bloomberg News]

On the eve of 2008 earnings announcements from China's top three State-controlled banks, analysts predicted that stricter provisions against doubtful loans could depress profit growth.

Related readings:  Bank of Communications Q4 profit dips 2%  Chinese financials to post sluggish Q4 earnings  Banks show rosy profit rise in 2008

They estimated that the Chinese banks' earnings before charges for 2008 would increase by 30 percent to 50 percent from 2007. But China's banking regulator is known to have asked banks to make a much higher bad loan provision than in previous years because of the global financial crisis. Analysts said the new requirement could trim earnings growth by up to 18 percent for certain banks.

Bank of China (BOC) and Industrial Commercial Bank of China (ICBC) will announce their 2008 earnings today and tomorrow, respectively. China Construction Bank (CCB) will issue a preliminary report on Saturday followed by an official 2008 earnings announcement the next Monday.

Because of their high capitalization relative to the market total, banks weigh heavily on the benchmark Shanghai Composite Index. In the last few weeks, the rise and fall of the benchmark index closely corresponded to the fluctuation in share prices of a few leading banks. Earnings reports from the top three state-controlled banks will have a big influence on the stock market.

High provisions are not necessarily a bearish factor, analysts said. Bank shares did well yesterday despite the provision concern. The Diversified Bank Index, which covers the shares of the 12 listed banks in Shanghai, climbed 2.26 percent to 1,693.35 points, its highest value since the beginning of March.

A report from Guoxin Securities said that maintaining a higher provision coverage ratio, a bank's reserves for loan losses against its outstanding bad loans, may reduce the banks' profits by 6 to 18 percentage points.

"Under new regulations from China's banking regulator, the provisions coverage ratio in State-controlled banks has to be higher than 150 percent. The top three banks have to increase their provisions to meet such requirement, which will cut their profits for 2008," said Zhang Jing, an analyst from Minzu Securities.

BOC, the first of the top three banks to announce its 2008 earnings, had a provision coverage ratio of 121.49 percent at the end of September 2008. Based on its 85 billion yuan in outstanding non-performing loans (NPL) at that time, BOC has to increase its provisions by 24.2 billion yuan to meet the 150 percent requirement, thus reducing its profits by the same amount.

The provision coverage ratio of ICBC and CCB stood at 121.16 percent and 119.41 percent, respectively, at the end of September 2008.

"We expected BOC to post the weakest full-year result among its peers due to a much sharper forecast increase in fourth-quarter credit cost, further provision for its US dollar securities portfolio and about HK$2.2 billion in investment write downs on its stake in Bank of East Asia," said Nick Lord, an analyst with financial services firm Macquarie.

Macquarie forecasts BOC's full-year net profit to reach 64 billion yuan in 2008, up 14 percent from a year ago.

Bank of Communications (BoCom), the first listed bank to announce its 2008 earnings, missed analysts' predictions when it set aside more provisions due to bad loan increases in the fourth quarter of last year. BoCom's fourth quarter net profit dipped 2 percent from a year earlier, sending its shares falling 1.01 percent in Shanghai on March 20. BoCom's provision coverage ratio rose to 166 percent at the end of 2008.

While most analysts from Chinese securities firms are projecting strong profit growth in China's top three State-controlled banks, analysts at international financial institutions are not as optimistic.

"Despite reaching a cyclical profitability peak, the shares of Chinese banks tumbled last year. Chinese bank shares in both Hong Kong and Shanghai have yet seen signs of bottoming out as their net interest margin continue to decline," said Lou Gang, Morgan Stanley's China strategist.

Chinese lenders issued 2.67 trillion yuan in new loans in the first two months of this year, up 159 percent over the same period last year.

"The asset quality in Chinese banks relies on the recovery of China's economy," said Zhang Jixiu, an analyst from Bohai Securities.

BOC suspended the trading of its shares in Shanghai yesterday because of an unscheduled board meeting. ICBC and CCB closed 1.06 and 1.19 percent higher in Shanghai, respectively.