Chinese banks' profit rally cut short as loans turn sour

The pressure on asset quality will be heavier in 2019.

Reuters reports that the profit outlook of China’s largest banks looks increasingly dim amidst the risk of deteriorating asset quality even as they were able to report rising profits in Q3.

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Agricultural Bank of China (AgBank) posted the largest quarterly earnings of the Big 5 at 8.6% YoY to $8.01b (CNY55.82b) followed by Bank of Communication who reported a 7% increase in profit to $2.37b (CNY16.53b).

China Construction Bank profits also rose 6.6% to $9.63b (CNY67.08b) whilst the earnings of Bank of China (BoC) and Industrial and Commercial Bank of China (ICBC) rose 5.7% to $6.34b (CNY44.19b) and 5.6% to $11.37b (CNY79.19b) respectively.

China’s overall economic slowdown, which represents its weakest pace of growth since the global financial crisis as well as deepening trade tensions will aggravate the struggle of smaller companies who are accessing credit for their growth requirements.

Also read: Chinese banks urged to accelerate lending as economy grinds to a halt

As such, defaults from SMEs continue to rise with the pressure only poised to be harder on firms. “Next year the pressure will be bigger (on margins and asset quality) than this year,” said Zhang Ming, a bank analyst at Hua Chuang Securities. 

The country's Big 5 state lenders, however, are faring better than their smaller and rural counterparts who are bearing the brunt of China's growing bad loan problem. Rural commercial banks have the highest NPL ratio amongst the country's lenders in Q1 at 3.26% compared to the joint stock banks and city commercial banks whose NPL ratios are at 1.7% and 1.53% respectively.

Here’s more from Reuters: