PRESSURE ON PROFITS AS COSTS SURGE

Bad debt continues to drag on performance, say analysts

HONG KONG/SHANGHAI

CHINESE lenders last year likely posted their lowest interest margins since the global financial crisis, due to higher costs and fewer lucrative lending options, with the going set to get tougher as the key gauge of profitability stays under pressure.

While credit growth in China has remained strong, bad debt continued to drag on performance, said analysts, ahead of annual reports from lenders starting next week.

Margins have been hit hard after Beijing cut benchmark interest rates six times in 2014-2015 to revive a slowing economy.

The pressure on net interest margins — the difference between interest paid and earned — would continue to weigh on bottom lines this year, adding to financial sector vulnerability, said analysts.

At Agricultural Bank of China, margins likely fell to 2.27 per cent last year, the lowest since at least 2008 and down from 2.66 per cent a year ago.

Among China’s top five lenders, Bank of China, Industrial and Commercial Bank of China and China Construction Bank are all set to see weaker margins.

China’s central bank has moved to marginal tightening this year by raising short-term interest rates in what economists see as a bid to curb capital outflows, and as policymakers look to rein in uncontrolled lending.

Smaller banks would see a “very sharp reduction” as liquidity tightens and they face higher funding costs with the interbank borrowing rates going up, said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis. Reuters