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Big China banks cut bad loans as profits beat forecasts

Thursday, March 30, 2017 - 10:38

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China Construction Bank Corp and Agricultural Bank of China Ltd, the nation's second and third largest banks by assets, both beat estimates in earnings this week, also helped by a drop in expenses.

[HONG KONG] Two of China’s biggest lenders cut their bad-loan ratios as they notched improved profits in 2016, showing the nation’s banking industry may be able to withstand slowing growth in the world’s second-biggest economy.

China Construction Bank Corp and Agricultural Bank of China Ltd, the nation’s second and third-largest banks by assets, both beat estimates in earnings this week, also helped by a drop in expenses.

Construction Bank cut operating costs by 12 per cent from a year earlier and saw its nonperforming loan ratio fall to 1.52 per cent from 1.58 per cent.

Agricultural Bank slashed costs by 13 per cent and its bad-loan ratio dropped to 2.37 per cent from 2.39 per cent.  

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China’s biggest banks are all reporting full-year earnings this week, with Industrial & Commercial Bank of China Ltd, the largest, reporting Thursday, and Bank of China Ltd on Friday.

The lenders have been struggling with rising defaults and narrower margins as economic growth slows to the weakest in a quarter century.

Tighter regulations on mortgage lending, off-balance sheet wealth management products and some cross-border financial services have also dragged on profits.

“Asset quality indicators have improved significantly,” China International Capital Corp analysts led by Anson Huang wrote in a report Thursday on Construction Bank’s results.

The analysts added that tighter liquidity conditions will also help the bank’s net interest margin.  

Jefferies Group analysts led by Victor Wang noted that Construction Bank’s asset quality had stabilised.

“It seems CCB’s new NPL formation peaked out in 2016 and hence future asset quality pressure may ease.”

Shares in both Construction Bank and Agricultural Bank dropped about 0.3 per cent as of 9.54am Hong Kong time on Thursday, matching the decline in Hong Kong's benchmark Hang Seng Index.

The two bank's results could indicate that the acceleration in profit growth and stabilisation in bad loan formation, which some analysts had expected to take place this year, is happening earlier than expected.

A better outlook may see the banks raise their dividend-payout ratios to as high as 50 per cent over the next three to five years, Sanford C Bernstein analyst Wei Hou said last week.

Even so, the improvements weren't matched by smaller rival Bank of Communications Co, whose bad-loan ratio increased in 2016, according to its filing Tuesday.

"What's positive to us is different nonperforming-loan indicators dropped during the period, meaning our risk control measures were efficient," Bocom President Peng Chun said at a media briefing in Hong Kong on Tuesday.

"What worries us is that the pressure is huge. I think for our new nonperforming loans, it's hard to say they have peaked."

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