Interim results show top Chinese banks heading for a lacklustre year.

China’s economic slowdown has checked the dynamic growth of its largest banks, with half-year results showing increases in bad loans and squeezed net interest margins. The big four state-owned banks posted feeble profit growth for the first half of 2015, marking a stark contrast to the vigorous double-digit growth of previous years (see chart one).

Chart one, ungrouped

The largest profit increase was posted by the Bank of China, which is also the smallest of the group by assets, where the profit inched up 1.69% to Rmb94.99bn ($14.95bn), significantly below the 10.97% increase for the same period last year.

China Construction Bank is the second best performer, with net profits rising by 0.97% to Rmb132.24bn, against 9.17% a year ago. It is followed by ICBC, which is the largest lender by assets, both locally and globally, and which posted a 0.70% net profit increase to Rmb149.43bn, down from 7.15% in 2014. Growth was most anaemic at Agricultural Bank of China which posted a 0.48% increase, bringing its net profit to Rmb104.56bn. Last year, the increase at the bank was 12.65%.

Bad loans rising 

This decline in profitability has been accompanied by rising non-performing loans (NPLs) and growing provisions. The slowing economy has led to a build-up of bad loans over the past few years (see chart two) with some banks significantly increasing their provisions for troubled loans – ICBC grew its allowance for impairment losses by 73.6%, while at China Construction Bank impairment losses grew 78.4%.

Chart two ungrouped

Many analysts think the true picture of the NPLs may be worse than the headline figures. At first glance, current levels of NPLs, while rising, are not particularly bad compared with 2008, when they were above 2% for all four banks (measured annually rather than by half-year).

According to a May report by rating agency Fitch, the NPL risk for China’s banks has been distorted by a balance sheet shift into debt investments, receivables and interbank exposures, all of which make identification of NPLs more difficult. Additionally, local banks have been disguising troubled loans by classifying some of them as 'special mention', meaning they are already in arrears but not long enough to earn the 'non-performing' moniker.

This particular category accounts for 4.13% of all loans at the Agricultural Bank of China, 3.61% at ICBC, 2.79% at  China Construction Bank and 2.3% at the Bank of China in addition to NPLs.   

Squeezed margins

While net interest margins have been rising over recent years (see chart three), the recent interim results for Chinese banks show that they also took a dive in the first half of the year. This is due not only to flagging demand but also central bank attempts to stimulate the economy by cutting the benchmark lending rate.

Chart three ungrouped

The interest rate pressure will continue for the rest of the year – on August 25, just before the banks released the interim results, China's central bank cut the interest rate again.

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