Chinese banks routinely publish good annual results these days. Their 2011 earnings, which will be announced from today onwards, are likely to set new records as well. But this good fortune will not continue. Rising bad loans and weaker demand are hurting the earnings outlook for banks in 2012.
Results for the Hong Kong-listed units of mainland banks are predicted to show that net profits grew 33% year-on-year, helped by a 49% jump in fee income and a 37% growth in net interest income, according to May Yan, a banking analyst at Barclays.
Reports from China’s banking regulator released during the National People’s Congress suggested that profits in the commercial banking industry grew 36% during 2011 — though that is the same figure reported after just the first nine months of last year.
Minsheng Bank is expected to lead the field with profit growth of 56%, helped by a 79% surge in fee income, whereas Bank of China brings up the rear with growth of just 18%, according to Barclays’ estimations.
Despite the strong results, Yan is cautious. “We expect increasing concern about slower-than-expected loan demand and profit growth in 2012,” she said, arguing that any upside from policy fine-tuning has already been priced in, leading her to change her rating on Chinese banks from “bullish” to “neutral”.
Standard & Poor’s also warned last week about a slump in earnings growth for Chinese banks during 2012 due to a slowing economy, falling property prices and the challenges of refinancing local government debt. The portion of Chinese banks’ loan books that is non-performing will reach as much as 5% this year.
Liao Qiang, a Beijing-based analyst at S&P, estimated that as much as 30% of loans to the local government could go sour and will probably become the biggest source of non-performing assets for China’s banks.
China’s most recent audit on local-government’s debt showed that around 79% of their Rmb10.7 trillion ($1.69 trillion) in loans at the end of 2010 was bank loans, more than half of which will mature by 2013. Most of the loans were issued during the global financial crisis when the Chinese government called on banks to pump Rmb4 trillion into the economy.
China’s banking regulator is reported to have ordered banks to roll over the loans issued to local governments so that they can avoid a mass default that would serve as a big blow to China’s economy. The regulator’s push in fixing the local government debt crisis underlines the challenge that Chinese banks are facing.
Unlike the problems in developed economies, China’s debt crisis is not caused by banks lending too much, but by lending too much to certain sectors of the economy, such as state-owned enterprises (SOEs) and local governments, while completely ignore private companies that may have used the money more productively.
Chinese banks’ strong earnings, which are traditionally driven by loan growth, have triggered much public anger. The lenders shovel workers’ savings into SOEs, depriving workers of spending power and private companies of capital, while the SOEs are wasting capital on a vast scale.
Bank of Communications (BoCom), China’s fifth-largest lender by assets, has said it would raise Rmb56.6 billion from a private placement to replenish capital. The deal, which will make BoCom the country’s best-capitalised bank, may be one of the world’s biggest share sales this year.