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Bad debt clouds outlook for top Chinese banks as 1st annual profit decline in years looms

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Bad debt clouds outlook for top Chinese banks as 1st annual profit decline in years looms

First-quarterearnings at the four largest banks in China show an alarming trend of growingbad debt is probably here to stay, heightening the possibility that they areheaded to their first annual profit decline in years in 2016.

Nonperformingloan ratios at Industrial &Commercial Bank of China Ltd., the largest Chinese bank by assets,and China Construction Bank Corp.rose at the end of March from three months earlier, when they were at multiyearhighs, according to SNL Financial data. The gauge for andBank of China Ltd.held steady at levels not seen in years.

Combinedasset write-downs at the four banks increased to 84.49 billion yuan in thequarter ended March 31 from a year earlier.

Anacceleration of NPL formation has emerged as a key challenge for Chinese banks,as the country's economic growth slows. Asset quality at Chinese lenders willlikely further weaken in 2016, S&P Global Ratings said in an April 8report. The rating agency expects the industrywide NPL ratio in China to hit3.1% by the end of 2016, rising from 2.2% a year earlier and almost doublingfrom 1.6% at the end of 2014.

"Thetroubles for Chinese banks are unlikely to disappear in a hurry," S&PGlobal Ratings said.

Risingcredit costs, combined with worsening interest margins, mean profit at big Chinesebanks is on track for the first decline in 13 years in 2016, the rating agencysaid.

Aggregatenet profit at the top four banks still edged up to 244.02 billion yuan in thefirst quarter from 241.28 billion yuan a year earlier, helped by growth inincome from fees and commissions.

Itremains to be seen how they will hold up for the rest of the year, though, asthey face interest margin contraction following multiple central bank ratecuts, in addition to rising credit costs.

Netprofit will likely fall at each of the four banks in 2016, according to analystestimates compiled by S&P Capital IQ. Last time full-year profit fell at ICBC was 2004, while forChina Construction Bank, an earnings decline in 2016 would be the first retreatsince 2002 and for Bank of China, the first since 2003. Agricultural Bank ofChina last posted an annual profit fall in 2007.

S&P Global Ratings andS&P Global Market Intelligence are divisions of S&P Global Inc. SNLFinancial and S&P Capital IQ are offerings of S&P Global MarketIntelligence.

As of May 5, US$1 wasequivalent to 6.50 Chinese yuan.

Click here to access the 2015 China Banking Report and here to access the China Banking Report Market Update.

Click here to view country level information about China.

Click here for more stories on Asia-Pacific banks and here to set real-time alerts for such data-driven articles. In Step 2, select Banking under the "Data Dispatch Asia-Pacific" section.