Chinese Banks’ First Half Results Leave Investors Worried

Chinese banks recently posted their financial results for the first half of the year, occasioning a lot of concern amongst investors. There’s even been a warning from a top rating agency, the Financial Times reports. It’s not that the numbers were particularly bad, but rather that they hinted of troubles possibly on the way.

The most troubling thing revealed by the public disclosures was the percentage of overdue loans. All the major banks reported a significant increase in overdue loans in the first half of 2012 The Bank of China (HKG3988), first of the big banks to report, disclosed a 17 percent increase in that particular area. Furthermore, its impairment charge was only half the size it was this time last year. Analysts and investors showed clearly that they were not satisfied with the figure. Victor Wang, analyst with Macquarie Securities, said that such a low impairment charge may not be enough “to cover future potential non-performing loans in a slowing economy”.

!m[](/uploads/story/328/thumbs/pic1_inline.png)In other respects China’s banks look perfectly healthy. The non-performing loans ratio for the sector was down to 0.9 percent in Q2, the lowest level in more than ten years. Bank of China alone reported a decrease of 6 basis points in the first half of the year, a pretty remarkable achievement considering that China’s economy is slowing. Bad loans figures were also positive, with only a small increase reported by the country’s leading institutions.

But with the midsized banks these numbers change dramatically. Ping An Bank (HKG:2318), for example, reported a 51 per cent spike in non-performing loans. This significant difference between China’s finest and the second tier banks can be attributed to the smaller banks being more affected by the struggles of private entrepreneurs in the coastal regions.

Another worrying sign is that profit at Chinese banks has dropped markedly from previous years – from an average of about 30 percent to around 10 percent this year. China’s central bank cut the interest rates to boost the country’s economy, but this has had a negative effect on banks in squeezing the margins they have long relied on to generate profit.

“The deterioration trend is just beginning,” said Bin Hu, an analyst with rating agency Moody’s. He added that the banks’ reports have signalled the end of the multi-year streak of improving financial performance. According to Lian Ping, chief economist at Bank of Communications, right now even a small downturn can wipe out the profit growth of Chinese banks. Another cut in the interest rates and a slight increase in non-performing loans of 0.2 percent could lead to negative profit growth, said Lian in a comment for China Securities Journal.
Investors responded negatively to the announcements. Bank of China’s stock price has been pushed down five percent since the financial results were announced. Other banks have also suffered in the markets as a result of the announcements.