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Top 4 Chinese banks hit by credit costs in 2015 as bad debt swells

Combined net profit at the top four Chinese banks barelyincreased in 2015, as a deepening economic slowdown pushed up bad debt ratiosby the most in at least seven years and boosted credit costs, underscoringgrowing challenges for lenders in the country.

Aggregate net profit at Industrial & Commercial Bank of China Ltd.,China Construction BankCorp., AgriculturalBank of China Ltd. and Bank of China Ltd. edged up to 856.70 billion yuan in2015 from 852.70 billion yuan in the prior year. All eked out increases, noneof which exceeded 1%.

Net interest income grew to a combined 1.730 trillion yuanfrom 1.682 trillion yuan. Net fees and commissions increased as well, to 431.88billion yuan from 412.38 billion yuan. Operating expenses were little changedat 664.62 billion yuan.

The gains were offset by credit costs, which jumped to atotal of 318.73 billion yuan from 231.04 billion yuan.

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Weakening growth in China's highly, and increasingly,leveraged economy, which expanded at the slowest pace in 25 years in 2015, willproduce more nonperforming loans in 2016, Moody's said in a December 2015report. Particularly, the rating agency cautioned about a deterioration ofloans to corporates. Moody's in March downgraded the outlook for China and the four , all state owned, tonegative from stable.

Fitch Ratings on April 7 echoed the warning, sayingworsening asset quality will continue to weigh on profitability at Chinesebanks in 2016.

"These pressures are likely to remain in 2016, withslowing economic growth contributing to higher NPL formation rates," Fitchsaid.

The nonperforming loan ratio of each of the big four rose bythe most at least since 2008, according to S&P Global Market Intelligencecalculations based on data going back that far. The increase was most profoundat Agricultural Bank of China, where the gauge shot up to a five-year high of2.39% at the end of 2015 from 1.54% a year earlier. The ratios at Industrial& Commercial Bank of China and Bank of China, too, reached levels not seensince 2010, while at China Construction Bank, the figure hit a six-year high.

On the other hand, net interest margins at the lendersnarrowed in 2015 as the People's Bank of China monetary easing withmultiple rate cuts. All four banks exited 2015 with the metric atthe lowest levels since 2011.

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Profitability at the banks, as measured by returns onaverage equity, was also the worst since at least 2009, according to S&PGlobal Market Intelligence data.

As of April 7, US$1was equivalent to 6.47 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.

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