SHANGHAI China Construction Bank Corp (601939.SS)(0939.HK), the country's No.2 lender, reported its slowest third-quarter earnings growth in more than five years on Sunday, as increased loan-loss provisions eroded profits.
Net profit rose 9.4 percent to 56.8 billion yuan ($9.3 billion) in July-September from 51.91 billion yuan a year earlier, according to Reuters calculations based on CCB's announcement. That compares with an average estimate of 57.69 billion yuan in a Reuters poll of four analysts.
The Q3 growth rate for CCB, the first of China's Big four banks to report third-quarter results, marked a slowdown from 12.9 percent growth in January-June.
Chinese banks' remain among the most profitable in the world, but they face increasing challenges from shrinking margins and rising bad loans, as the country's economy slows from the supercharged pace of the last decade and policymakers push ahead with market-based reforms to interest rates.
CCB's non-performing loan ratio fell slightly to 0.98 percent by end-Sept, down from 0.99 percent at end-June.
But in a sign the bank remains wary of a rise in bad loans, the bank set aside 9.6 billion yuan in provisions in the third quarter, up 12.1 percent from the same period last year. The increased provisioning was a key factor in the lower-than-expected bottom line.
The latest official figures for system-wide NPLs show the ratio at 0.96 at end-June, though most outside analysts believe the true ratio is higher.
CCB's net interest margins held steady at 2.71 percent in the third quarter, unchanged from the second quarter.
Margins are expected to shrink in the medium term as China pushes ahead with interest-rate liberalization, raising banks' cost of funds while increasing competition for borrowers.
In July the central bank eliminated the official lower limit on bank lending rates.
Last week it introduced a new, market-oriented lending benchmark, in the latest incremental step towards more market-based credit allocation.
Market watchers are on the lookout for further progress on liberalizing bank deposit rates at a key Communist Party meeting scheduled for next month.
CCB's loan book grew by 3.4 percent in the third quarter compared to three months earlier, a faster pace than the second quarter, defying predictions that loan growth would slow markedly as authorities focused on deleveraging to combat rising financial risks.
A severe cash crunch engineered by the central bank in late June had been interpreted as a sign that authorities wanted to trim credit growth.
But analysts were surprised by the swift pace of new lending in recent months, as system-wide loans outstanding rose 14.5 percent year-on-year through end-September.
Many analysts said authorities appeared to loosen the credit taps again following the crunch to prevent an overly rapid slowdown in economic growth.
The surge in new credit appears to have had the desired impact, as China's economy posted real GDP growth of 7.8 percent in the third quarter, marking only the second quarter in the last 10 in which growth has accelerated.
($1 = 6.0840 Chinese yuan)
(This version of the story corrects the third quarter net profit to 56.8 billion yuan from 56.5 billion, percent change to 9.4 from 8.9.)
(Reporting By Gabriel Wildau; Editing by Michael Perry and Jeremy Laurence)