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Bad debts, margin pressure cloud Chinese largest banks' outlook

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Bad debts, margin pressure cloud Chinese largest banks' outlook

Three of China's four largest banks by assets reported lower nonperforming loan ratios in the second quarter from a year ago, but an increase in their buffers against troubled loans signals challenging times ahead.

In the three months ended June 30, China Construction Bank Corp.'s NPL ratio fell to 1.48% from 1.51% a year earlier, while Industrial & Commercial Bank of China Ltd. posted a slide in the NPL ratio to 1.54% from 1.57% a year earlier. Agricultural Bank of China Ltd.'s ratio dropped to 1.62%, the highest ratio among the four due to its higher exposure to rural and small business borrowers, from 2.19% at the end of June 2017.

Meanwhile, Bank of China Ltd. saw its NPL ratio edge up year over year to 1.43% from 1.38%.

Despite improving asset quality, these banks increased their loan-loss provision coverage ratios in anticipation of escalating global trade tensions and slowing economic growth. For example, Agricultural Bank of China's loan-loss provision coverage ratio rose to 248.40%, the highest among the four banks, from 181.80% a year earlier.

Another challenge facing the banks is in their lending business. Net interest margins were largely flat in the first half, and they are likely be under pressure in the second half.

Lending rates in China are set to be weighed down by the uncertain economic outlook, as well as an expanding credit supply after the country's central bank cut reserve requirements for most banks three times this year.

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