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China’s big banks bag more profits despite trade tensions
August 30, 2018
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Agricultural Bank of China (AgBank), the country’s third-largest lender, expects its asset quality to stabilise in the second half, but said it had increased provisions as trade tensions threaten the global economy.

The comments come after the United Stated and China last week activated another round of duelling tariffs on $16 billion worth of each country’s goods. The two have threatened duties on most of the rest of their bilateral trade.

Economists reckon that every $100 billion of imports hit by tariffs would cut global trade by around 0.5 per cent and impact China’s economic growth in 2018 by 0.1 to 0.3 percentage points.

Trade friction started by “some country” is threatening global economic stability, AgBank President Zhao Huan told a news conference on Wednesday, a day after the lender reported higher earnings for the first half of the year.

“We conducted risk analysis of potential risk that can be caused by markets and trade frictions and made arrangement for increasing provisions,” he said, adding provisions rose 46 per cent year-on-year in the first half “mainly because we were prudent.” “We remain confident in China’s economy but the impact of trade frictions on the global economy and China remains to be seen. So we are making preparation for potential risks when we still have the ability to do so.” For the six months to June, AgBank’s results were underpinned by improvement in both margins and bad loans ratio.

A similar pattern emerged from the interim results of China Construction Bank Corp (CCB) and Bank of China Ltd (BoC) - the country’s second- and fourth-biggest lenders.

Their balance sheets were also propped up by diverse revenue sources and strong capital buffers that gave them an edge over smaller peers which have been hit by China’s crackdown on risk.

“The results of the top four banks are not enough for investors to regain confidence in the broader banking sector because the economy is going to slow in the second half,” said Steven Leung, Hong Kong-based sales director, UOB Kay Hian.

“The Big Four banks mostly lend to the local government bodies and government-linked enterprises, so they will be able to manage the bad debt situation. But that’s not true for the entire banking sector.”

ASSET QUALITY

AgBank, BoC, and CCB posted steady non-performing loan (NPL) ratios for the first half of 2018. In stark contrast, the NPL ratio for the banking sector was 1.86 per cent at end-June, data from the China Banking and Insurance Regulatory Commission shows, the highest since 2009.

Beijing is pumping funds into the banking system and rolling out measures for local businesses to cushion the impact from the Sino-US trade war, but analysts fear an unrestrained, credit-fuelled growth could lead to a further build up in bad loans as the Chinese economy cools.

AgBank will conduct a review of its overdue corporate loans in the second half, Zhao said, while assuring that asset quality was expected to stabilise and improve for the rest of 2018.

CCB and BoC followed suit with positive second-half asset quality forecasts during their press conferences on Wednesday.

BoC’s chief risk officer, Pan Yuehan, said the lender expected stable asset quality, while CCB’s Chief Risk Officer Liao Lin said the bank’s asset quality would be under control.

RESULTS IMPROVE

Net profit for AgBank rose 7 per cent in the six months ended June from a year earlier to 115.8 billion yuan ($16.85 billion). BoC saw a 5 per cent rise in profit to 109.1 billion yuan, while CCB netted a 6 per cent rise, raking in 147.0 billion yuan.

Results for AgBank and BoC were aided by higher net interest margins (NIM), the difference between interest paid and earned - a key gauge of profitability for lenders.

But CCB and AgBank are likely to see their NIM come under pressure in the second half amid easier access to cash, said BoCom International in Wednesday research notes.

Bank of Communications Co Ltd, the country’s No.5 listed bank by assets, reported higher profits and improvement in its bad debt ratio last week.

Analysts, however, flagged concerns about the unexpectedly slow deposit growth in the banking sector.

“Growth of deposits has been bad not only for joint stock banks and city commercial lenders, but it hasn’t been great for the big ones either,” said Zhang Ming, a banks analyst at Huachuang Securities.

Meanwhile, the Chinese government will continue implementing measures in order to cushion its economy from the impact of the ongoing trade spat with the US, a leading China economist said on Wednesday.

“We are not expecting any major growth correction because we think the potential impact from trade tariffs will be partially cushioned by the policy easing measures taken by the policy makers,” Robin Xing, chief China economist at Morgan Stanley, told CNBC at the Morgan Stanley Technology, Media and Telecom Conference in Beijing.

Just last week, the US and China slapped tariffs on $16 billion worth of goods on each other. Both countries also imposed tit-for-tat levies on $34 billion worth of each other’s imports in July.

Market watchers are now keeping their eyes on a fresh round of US tariffs on $200 billion worth of Chinese goods expected later this year.

If the US imposes those additional tariffs, the impact could be “amplified” by how connected supply chains in East Asia are to China, Xing said.

In fact, the trade war’s disruption to supply chains could cut 0.7 percentage points from China’s growth, he said.

That will spur Beijing to take up more meaningful easing measures such as tax cuts and boosts to credit and liquidity in China’s financial system.

US tariffs appear to be affecting the Chinese economy already as the latest manufacturing data show slowing export orders. Xing said he expected economic activity to weaken further in August, although he suggested Beijing will likely cushion that impact in September and October through new bonds. By the fourth quarter, infrastructure spending will also soften the blow from the U.S. tariffs, Xing told CNBC.

Agencies

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