Net income in the quarter ended June rose 5.8% from a year earlier to 81.6 billion yuan (US$11.9 billion), according to an exchange filing Thursday, broadly in line with estimates. China’s five biggest banks have all reported profit growth of at least 5% for the latest quarter, and escaped the surge in bad loans that swamped smaller lenders.
While the big five benefited from President Xi Jinping’s crackdown on riskier shadow financing in the first half, analysts are cutting profit forecasts for the rest of this year as an intensifying trade war with the US threatens to slow China’s growth. Lenders’ pricing power and capital strength may also be weakened by a renewed push for credit expansion and loosening of monetary policy, as authorities look to sustain the economy.
The second half of this year and 2019 will be challenging for ICBC amid economic uncertainties, and the bank is stress-testing companies exposed to the trade war, Chairman Yi Huiman said at a briefing in Beijing. Still, ICBC aims to maintain stable margins and asset quality, he said.
Net profit of state-owned banks would grow 5.6% in the second quarter, analysts led by Shujin Chen at Hua Tai Securities Ltd. wrote in a note dated August 14.
Analysts surveyed by Bloomberg now predict combined profits at the big five will increase about 5% in 2018, less than the 8% forecast in March. ICBC and rivals China Construction Bank Corp, Agricultural Bank of China Ltd, Bank of China Ltd and Bank of Communications Co together control more than a third of China’s US$40 trillion in banking assets and posted 4% profit growth in 2017.
Investors are pricing in this risk. Shares of the big banks are trading at an average 0.7 times their estimated book value for 2018, compared with 1.1 times for HSBC Holdings Plc and 1.7 times for JPMorgan Chase & Co. ICBC has fallen 7.8% in Hong Kong and 12.9% in Shanghai this year.
“Given valuations have dropped from a higher level, it’s more difficult for banks to tap the market for funding,” said Grace Wu, Hong Kong-based senior director at Fitch Ratings. “One of the key constraints holding back the banks from extending another round of stimulus is always the fact that there isn’t enough capital.”
Profit growth
Moreover, directing banks to extend loans to specific sectors hampers their prudential management, Wu said. China’s regulators have taken several steps to free up credit in the past month, and recently ordered lenders to boost support for infrastructure projects, small businesses, agriculture and exporters.
The order to step up lending comes against a backdrop of rising corporate defaults and a surge in bad debt in the second quarter, though most of the increase came from rural lenders.
ICBC plans to dispose of 220 billion yuan of soured loans this year, Yi said. Demand for loans is strong and the lender has “moderately” raised its growth target for 2018, President Gu Shu said at the briefing.