China’s biggest banks beat profit forecasts after bad loans curbed

SHANGHAI: Three of China’s biggest banks posted quarterly profit that beat estimates as they curbed bad loans and benefitted from the nation’s anti-leveraging campaign.

Industrial & Commercial Bank of China Ltd reported a 2.3% gain in net income for the three months ended June, according to figures derived from first-half earnings reported to Hong Kong’s exchange yesterday.

Agricultural Bank of China Ltd had a 4.8% increase, while Bank of China Ltd posted a 23% gain, separate filings showed.

China’s economic recovery has bolstered the banks, which, along with China Construction Bank Corp, control about a third of the nation’s US$36 trillion of banking assets. What’s more, as interbank lenders, the Big Four’s interest margins have benefited from the government’s campaign against financial leverage, which has driven up the rates that banks pay to borrow from each other.

Here are the banks’ second-quarter net income numbers - ICBC: 77.2 billion yuan (US$11.7bil) versus year earlier 75.45 billion; AgBank: 52.9 billion yuan versus 50.46 billion yuan; Bank of China: 57.04 billion versus 46.42 billion yuan.

The government’s develeraging efforts, renewed in earnest since the start of April, have sought to curb shadow financing and unravel the complex web of ties between Chinese lenders.

Interbank leverage fell in the first half of 2017 for the first time in seven years, while the value of wealth-management products, a key form of off-balance sheet financing, slumped in May by the most in a decade.

Meanwhile, demand for traditional loans increased. Banks advanced a record 8.2 trillion yuan of new lending in the first half, 12% more than a year earlier, central bank data show. Big banks’ net interest margins benefited. Unlike smaller lenders, which often rely on short-term borrowings from other financial institutions, the Big Four together control 40% of Chinese deposits, thanks to their extensive branch networks and hundreds of millions of retail customers. That’s enabled them to provide liquidity on the interbank market, where borrowing costs have surged to the highest in two years.

Bank of China’s net interest margin expanded to 1.88% in the second quarter from 1.8% in the first quarter. ICBC’s NIM was 2.16% at the end of the first half from 2.12% in March.

By contrast, smaller banks such as Bank of Ningbo Co have reported sharp contractions.

Bets that earnings of the big banks will withstand the develeraging campaign have helped their stock prices outperform smaller rivals since March.

Shares of the Big Four last traded at an average of 0.8 times their estimated book value in Hong Kong, compared with a low of about 0.68 times six months ago.

“There’s a flight to safety attitude here,” Andrew Collier, managing director of Orient Capital Research, said in a Bloomberg TV interview in Hong Kong before the earnings release. “Go to the big banks, they’ve got captured deposits from everybody across China, they’ve got less of the shadow-banking junk on their balance sheets and so people have figured that’s the safer bet.”