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Profits at China’s biggest five banks rose 13 percent in the first half, and analysts are predicting growth may slow to single digits as the nation’s economic slowdown produces an increase in bad loans and bites into margins.self storageAdding to banking woes, national financial reforms are expected to ratchet up competition in the sector.Industrial and Commercial Bank of China (ICBC), China Construction Bank, Agricultural Bank of China (AgBank), Bank of China and the Bank of Communications reported a combined net profit of 466 billion yuan (US$75.7 billion) in the first six months of 2013.That 13 percent increase was the weakest growth in four years, following gains of 15 percent in 2012, 33 percent in 2011 and 30 percent in 2010.China International Capital Corp, one of the nation’s biggest investment banks, predicted net profits of the Big Five will rise 11 percent this year to 862 billion yuan, with growth slowing to 10 percent in 2014 and 8 percent in 2015.Indeed, there is growing evidence that the heyday of Chinese bank earnings is on the wane.“Rising credit costs, compressing interest margins and growing pressure on non-interest income will constitute a triple-whammy hit on earnings,” Standard and Poor’s said in its latest credit outlook on China’s banking industry.All the Big Five, except Bank of China, posted slower growth in the first six months. Net profit at Bank of China rose 12.9 percent, compared with 7.5 percent growth in the same period last year.ICBC, the nation’s biggest lender, reported the smallest drop of the five, at 0.16 percentage point.“We will look at the interest rate liberalization rationally and determine the right price level to maintain appropriate market share and interest spreads,” Yi Huiman, president of ICBC, told a news conference last month.“Although the lending rate floor has been removed, we remain prudent on pricing loans,” he added. “We have a unified pricing model to keep our loan proceeds in a high level among peers.”AgBank posted the biggest percentage earnings drop of the five, at 6 percentage points. However, its first-half growth of 14.7 percent topped the group. The bank is forecast to be the only one of the quintet likely to keep double-digit yearly growth in the next two years, according to investment bank International Capital’s latest report.Large Chinese banks r迷你倉ly heavily on lending to big state-owned companies to drive growth. Interest income comprises the lion’s share of their earnings, accounting for 74 percent of operating income at the Big Five in the first six months. That was down from 77 percent a year earlier. Bank of China has the most balanced income structure among the Big Five. Its net interest income accounted for 67 percent of total income.Quality growthMoreover, the stronger growth momentum of fee income may also suggest that the Big Five are on track to achieve more quality growth. Net fee income in aggregate expanded 24 percent in the first half — nearly three times the growth rate of net interest income.Despite improving income structures, the massive interest earnings of the banking giants have come at a cost. Latent credit risks have been mounting.Although the bad loan ratio of the Big Five stayed largely flat at 1 percent at the end of June, there are signs that asset quality is eroding.Bad loans of the Big Five in the latest six months increased by 22.4 billion yuan to 350 billion yuan. Agbank had both the largest amount of bad loans and the highest non-performing loan ratio among the group.Bad loan write-offs by the five amounted to 22 billion yuan in the first half, representing 90 percent of total write-offs for the whole of 2012.Higher credit losses in coming years is likely, despite the low ratio of non-performing loans and the generally good track record in maintaining low credit losses in the past five years, said S&P in its outlook report.However, the Big Five are less exposed to credit loss shock than smaller banks, given their relatively diversified credit portfolios, stronger fee income and cheaper funding costs due to their economies of scale.Banks operating in export-heavy coastal regions could face higher credit losses than banks elsewhere in China in the next 12 to 18 months due to their exposure to companies stung by sluggish overseas demand.S&P attributed China’s relevantly flat bad loan ratio to the booming “shadow banking” sector that has helped to contain credit losses in the past few years.However, the non-performing loan ratio of the Chinese banking industry is expected to jump to 3 percent by the end of this year, rising from an average 0.96 percent for the whole sector in the first half and from 1.6 percent at the end of last year, the rating agency predicted. 文件倉