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[SHANGHAI] Three of China's "Big Four" state-owned banks said they were bracing for slower economic growth this year, after they cut dividends and reported near-flat or falling quarterly profits on Wednesday.
Lenders are seeing margins dwindle following successive interest rate cuts, while highly-leveraged corporate borrowers are leaving banks with more soured debt in an economy that is growing at its slowest pace in about quarter of a century.
"It's really tough for commercial banks to make money," said Bank of China (BOC) President Chen Siqing at an annual results news conference in Beijing. "China's economy is challenged by big downward pressure, putting pressure on asset quality."
The world's biggest lender, Industrial and Commercial Bank of China Ltd (ICBC) , reported fourth quarter profit that was unchanged from the same period a year prior at 55.4 billion yuan (US$8.55 billion).
BoC's fourth quarter profit rose 2 per cent to 39 billion yuan over the same period, while China Construction Bank Corp reported a 2.5 per cent fall in profit in the fourth quarter.
"Cutting dividend is the most logical thing to do given all that is happening," said Benjamin Chang, CEO of Hong Kong-based LBN Advisers, which manages about US$400 million. "People are expecting the bad debt issue to deteriorate," he added.
While banks have ramped up lending during a government stimulus drive to revive economic growth, 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.
As a result, Chinese banks' non-performing loans (NPLs) have ballooned to a 10-year high of 1.27 trillion yuan, or 1.67 per cent of the all loans outstanding at the end of last year, according to data from the China Banking Regulatory Commission.
Earlier in the week, Bank of Communications, China's fifth biggest lender, also reported flat profits, while its president Peng Chun said 1 per cent net profit growth this year "won't be easy." All three of the banks reporting on Wednesday cut dividend payouts for ordinary shares for this year in an effort to preserve capital.
Net interest margins (NIM) - the difference between a bank's borrowing rate and interest earned on loans - also fell at all four lenders, a sign that falling interest rates are squeezing returns from loans. "We estimate that new policies will narrow NIM by 20bps (basis points) which will have a definite impact on earnings this year," said Yi Huiman, president of ICBC.
The NPL ratio at ICBC rose to 1.5 per cent as at end-December, from 1.44 per cent at end-September, while BoC's was flat. At CCB, the NPL ratio hit 1.58 per cent at end-December from 1.45 per cent at end-September.
Analysts are also predicting a tough year for banks.
Lower NIMs and higher NPLs could result in ICBC's profit falling 3.3 per cent this year, according to a March research note from China Merchants Securities (HK).
At BoC, the Chinese bank with the biggest global footprint, analysts are divided whether its global reach is a help or not. "BoC should prove to be more resilient than peers amid the current operating environment thanks to its larger overseas exposure," China Merchants Securities said.
But given that a large proportion of BoC's overseas loans originate from currency arbitrage, the business could shrink this year as the market expects further yuan depreciation, said Daiwa Capital Markets in a March note.