Earnings at major Chinese banks are set to grow more slowly in the fourth quarter as a cooling economy is weighing on lending margins and asset quality.
The combined net profit at the four largest banks — Industrial & Commercial Bank of China Ltd., or ICBC, China Construction Bank Corp., Agricultural Bank of China Ltd., and Bank of China Ltd. — is expected to grow by a low- to mid-single digit for the full year 2021, after rising 11.89% for the first nine months from a year earlier, according to Michael Chang, China financial analyst at CGS-CIMB Securities. The growth was largely driven by gains from trading and investment securities, which were more than double in the third quarter from a year earlier. Meanwhile, net interest income grew at single digits, and net fee income even shrank for two of the four lenders.
Interest rates, a key factor in a bank's profitability, are likely to remain low for longer as recent economic indicators suggest the world's second-largest economy will likely cool further after a slowdown in the third quarter. Measures that curb home prices and the leverage of developers, as well as strict lockdowns due to recurring COVID-19 outbreaks, are taking steam off the economy. Chinese banks are also tightening credit and increase buffers against bad loans as more developers are missing payments on bonds or wealth management products they guarantee.
The nation's four largest lenders reported a total net income of 282.34 billion yuan in the quarter ended Sept. 30, a year-over-year growth of 13.2%. Among the four banks, China Construction Bank reported the highest net profit growth of 15.61% in the third quarter from a year earlier. ICBC had the lowest growth of 10.59% among the four lenders.
Margin, provision risk
Net interest margin has been declining in recent quarters. The four banks' NIM averaged 1.98% as of Sept. 30, compared with 2% in the prior-year quarter. Among the four, China Construction Bank and Agricultural Bank of China had the highest margin of 2.08%, while Bank of China had the lowest margin of 1.70%.
While the low interest rate in China has narrowed the interest rate spread, the big four's overall net interest income should still be able to exhibit steady growth due to solid loan demand and relatively good asset quality, according to Avishek Suman, Beijing-based head of investment research, China at Acuity Knowledge Partners, a research and analytics firm.
Net interest income grew the most at ICBC and was up 7.3% in the third quarter from a year earlier. Bank of China had the weakest growth of 2.4%.
Another key challenge on banks' profitability would be how sustainable and how quickly the economy could recover, which would affect the credit impairment cost of the sector, said Steven Xu, financial services partner at EY China.
"On a positive side, China's 'dual circulation' policies are expected to play a positive role in driving growth and offsetting the impact," Xu said. The so-called "dual circulation" is a national economic policy coined in late 2020 that emphasizes domestic consumption and reducing reliance on the rest of the world.
Chinese banks will also continue to find opportunities to expand profits in sectors where authorities greenlighted growth, such as the high-tech semiconductor sector, said Daryl Liew, chief investment officer at Reyl Singapore, a wealth and asset management firm.
Sluggish fee income
Growth of net fee and commission income was mostly sluggish for major lenders in the third quarter. Bank of China reported a year-over-year drop of 3.3%, followed by a 0.3% contraction at ICBC. Net fee and commission income at China Construction Bank grew 4.7%, and Agricultural Bank of China's dropped 18.5%.
Banks' share of net fee and commission income within the total operating income has been declining this year.
"The four major banks are proactively adjusting their revenue structure, focusing on the fee-based business, such as wealth management and credit card services," said Acuity's Suman. "However, given the sheer size of these banks and their reliance on the traditional interest-based business, which has also grown, the fee-based business is not expected to be the major driver of their top line in the short term."
As of Nov. 5, US$1 was equivalent to 6.40 Chinese yuan.