China banks to post slower profit growth, problems loom

SHANGHAI (Reuters) - China's top banks are expected to report slower profit growth in the third quarter, hurt by a cooling economy, cuts in lending rates and fallout from the global financial crisis.

But the figures will probably look healthy compared with those of many other large financial institutions around the world which have been hit much harder by turmoil in credit markets.

"We expect the major drivers for strong earnings are still intact, namely robust deposit growth, expanding NIM (net interest margins), stable credit costs thanks to resilient asset quality, and tax rate changes," UBS said in an October 16 research note.

Still, flush times for Chinese banks, fueled by double-digit economic growth, are coming to an end as funding costs rise and asset quality comes under pressure.

China's economic growth slowed to 9.0 percent in the third quarter from 10.1 percent in the previous three months.

Although Chinese banks have been mostly insulated from direct exposure to the financial crisis which has battered western rivals such as Citigroup (C.N) and Royal Bank of Scotland (RBS.L), shrinking interest margins and rising loan defaults are likely to bite into lenders' profits, analysts said.

"We expect an earnings growth slowdown in the third quarter given a contraction in net interest margins and higher credit costs," said Y.K. Lee, an analyst at Core-Pacific Yamaichi.

GROWING WAVE OF DEFAULTS?

A wave of credit defaults could be building among small and medium-sized companies in China due to slowing exports, a weaker economy and a battered property sector in several cities, raising the specter of a pile of bad loans at Chinese lenders.

China Construction Bank (0939.HK)(601939.SS) is one of the principal lenders to steelmaker FerroChina (FERR.SI), which has been unable to repay 706 million yuan of loans and suspended operations at its China plant.

Third-quarter net profit at Industrial and Commercial Bank of China (ICBC) (1398.HK) (601398.SS), the world's biggest bank by market value, is expected to rise 17 percent from a year earlier to 26.36 billion yuan ($3.86 billion) under international accounting rules, UBS estimates. That compares with a 60 percent surge in the first half.

China Construction Bank, the country's second-largest lender and partly owned by Bank of America (BAC.N), is forecast by UBS to report a 4.6 percent increase in third-quarter profit year-on-year to 23.86 billion yuan. That's compares with a 71 percent jump in first-half earnings.

Both banks plan to release third-quarter earnings on Friday.

Bank of China (3988.HK)(601988.SS), which has the biggest foreign exposure of China's large banks, is expected by UBS to see quarterly earnings of 18.09 billion yuan, up 13.8 percent from a year earlier. That compares with first-half growth of 41 percent. Bank of China reports next week.

UBS also noted in its report that, compared with second-quarter results, net profit at all three banks was likely to show a decline due to write-offs connected with subprime mortgage loans and holdings of debt in failed Wall Street bank Lehman Brothers.

China Construction Bank said in a preliminary statement on Monday that profit during the first nine months of the year rose 48 percent to 84.55 billion yuan, under domestic accounting rules.

The Hong Kong-listed shares of all three lenders have lost between 35 percent and 48 percent since the start of the year amid turmoil in financial markets and fears of a global recession.

(Editing by Kim Coghill)

(Additional reporting by Michael Flaherty in Hong Kong)