Slowdown Will Weigh on China's Big 4 Banks
China's four big banks are expected to report profit increases for 2008, outshining their Western peers despite falling interest margins and increased provisioning in the fourth quarter.
But difficulties posed by the worsening economic environment will weigh on the banks' results in the first quarter and the rest of this year, analysts say, though increased lending activity could limit the downside.
'Net interest margin and asset quality are the key drivers for banks,' said She Minhua, a Shanghai-based analyst at China Securities Co. 'Though we haven't seen a distinct deterioration in the quality of banks' assets, their net interest margins have been narrowing after they peaked in the second quarter.'
Beijing, in its push to jump-start China's economy, has encouraged banks to boost lending. In January, banks made 1.6 trillion yuan ($233.9 billion) in new loans, and data due this week are expected to show another strong rise in lending in February.
Net interest margins of Chinese banks will likely fall by as much as half a percentage point this year, after the central bank cut rates in order to support the economy, analysts say.
Another factor hanging over Chinese banks is the potential for an increase in bad loans if the economy deteriorates. China's banking regulator has indirectly acknowledged that risk. It ordered banks to set aside provisions equivalent to at least 130% of loans that are likely to turn sour.
Industrial & Commercial Bank of China Ltd., the largest Chinese lender by assets, is expected later this month to report a 35% rise in net profit for 2008, according to the average forecast of five analysts surveyed by Dow Jones Newswires.
ICBC is less vulnerable to an interest-margin squeeze because of its relatively lower loan-to-deposit ratio, but concerns that the bank's strategic investors could sell some or all of their stakes are putting pressure on its stock. Goldman Sachs Group Inc., Allianz SE and American Express Co. own a combined 7.2% stake in ICBC. Lockup periods for the shares will expire in April and October, allowing the companies to sell.
Analysts surveyed expect full-year net profit at China Construction Bank Corp., the second-largest Chinese bank, to rise 45%. The bank, which has focused on providing long-term funding for infrastructure, will benefit from China's four-trillion-yuan stimulus package.
In addition, Bank of America Corp. could continue to sell its stake in the Chinese lender to boost its own capital. In January, the U.S. bank raised $2.8 billion by trimming its stake to 16.6% from 19.1%.
Bank of China Ltd. is expected to post a 25% increase in 2008 net profit, but a worse-than-expected deterioration in the global mortgage markets will hurt the bank. Its exposure to subprime investments is the largest among Asia's financial institutions.
The smallest of the four, Bank of Communications Co., is expected to report a 41% rise in full-year net profit. |
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