(Repeats story moved late on Thursday with no changes)
By Gabriel Wildau and Lawrence White
SHANGHAI/HONG KONG, March 27 China's biggest
banks showed milder-than-expected signs of financial stress from
loan defaults and shrinking profit margins, cheering investors
even as the lenders this week posted their slowest profit growth
since they became listed.
A slowing economy and the debt overhang from the massive
credit-fuelled stimulus that Chinese policymakers launched in
response to the 2008 financial crisis are stoking concern about
a rise in bad loans.
China's first-ever domestic bond default earlier this month
also sent ripples through credit markets after regulators
refused to step in with a bailout for solar equipment maker
Investors had expected China's biggest lenders to sacrifice
profit growth in favour of bolstering provisions, but
fourth-quarter net profits from Industrial and Commercial Bank
of China, the world's largest lender by market value, and Bank
of China Ltd , the country's fourth largest
bank, solidly beat expectations.
Agricultural Bank of China Ltd , the
third largest Chinese bank, reported earnings within
expectations, but its Hong Kong shares have risen almost 7
percent so far this week as investors took heart from a drop in
the non-performing loan (NPL) ratio to 1.22 percent from 1.24
percent in the previous quarter.
AgBank's share increase is almost double the rise in the
Hang Seng Finance Index so far this week.
"Despite scary headlines about loan and wealth management
product defaults, the credit shock that has been widely
anticipated for several years has yet to materialize," said
James Antos, Asia ex-Japan banks analyst at Mizuho Securities in
Fears of a deterioration in their loan portfolios have
dragged valuations for Chinese bank shares down to among the
lowest in the world. The average twelve-month forward
price-to-earnings ratio for mainland-listed bank shares was 4.3
at market close on Wednesday. Only Kazakhstan is lower.
Agbank Chief Risk Officer Song Xianping predicted NPLs to
rise slightly this year, but said the ratio was likely to remain
stable. "The bank has sufficient provisions and financial
resources to absorb risk. The overall risk is controllable," he
told an earnings briefing on Tuesday.
ICBC's non-performing loan ratio inched up to 0.94 percent
at end-December 2013, from 0.91 percent the previous quarter,
but the bank said it would increase total assets by the end of
this year to keep its NPL ratio within 1.2 percent.
SLOWING PROFIT GROWTH
A broad range of indicators has depicted a slowdown in
China's growth in recent months and this, combined with the
fears of loan defaults, has turned depositors and investors
The index of Hong Kong-listed mainland financial stocks
has fallen 11.1 percent so far this year, compared to a
loss of 8.7 percent for an index of all Hong Kong-listed
Police this week also arrested people accused of starting a
rumour about the solvency of a rural bank.
The overall NPL ratio of China's banking sector hit a
two-year high of 1.0 percent at the end of 2013, up from 0.97
percent at end-September.
But a Reuters survey of more than 80 companies with elevated
debt ratios or problems with overcapacity revealed many banks
were becoming more selective about whom they lend to.
Analysts and bankers expect this strategy to further slow
profit growth at Chinese banks this year.
Chinese lenders, however, remain among the most profitable
in the world, with industry-wide return on equity at 19.2
percent at the end of 2013. By comparison, JP Morgan Chase & Co
had an ROE of 8.4 percent in 2013.
Net interest margins are also expected to shrink as China
moves to phase out the cap on bank deposit rates. The central
bank expects deposit-rate liberalisation to be complete "within
one to two years."
But the latest earnings reports show that tighter credit
conditions in the last three months of 2013 helped support bank
margins by giving lenders greater leverage to demand higher
interest rates from borrowers. Both AgBank and BOC reported
slight rises in their net interest margins, while ICBC's was
flat. ($1 = 6.2094 Chinese Yuan)
(Additional reporting by Shanghai newsroom; Editing by Miral