| SHANGHAI/HONG KONG
SHANGHAI/HONG KONG 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 Chaori Solar (002506.SZ).
Investors had expected China's biggest lenders to sacrifice profit growth in favor 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 (601988.SS)(3988.HK), the country's fourth largest bank, solidly beat expectations.
Agricultural Bank of China Ltd (601288.SS)(1288.HK), 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 .HSNF 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 Hong Kong.
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 jittery.
The index of Hong Kong-listed mainland financial stocks .HSHFI 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 mainland shares .HSCE.
Police this week also arrested people accused of starting a rumor 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 (JPM.N) 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 liberalization 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 Fahmy)