China's Push to Lower Debt Levels Boosts Results at Big Banks
China's campaign to lower debt levels boosted the third-quarter results of the country's big state-owned banks, building on a trend that has widened their advantage over smaller lenders.
To reduce risks in the financial sector, Chinese regulators this year have made it more expensive for banks to borrow from each other. That has benefited the big state banks, which use their vast retail deposit franchises to lend to other lenders, while the smaller banks have struggled with the higher funding costs.
Industrial & Commercial Bank of China Ltd. said Monday its net profit rose 3.4% from a year earlier to 75 billion yuan ($11.3 billion) in the third quarter, picking up pace from its 1.85% profit growth in the first half. In the past two years, the world's largest bank by assets reported near-flat net profit as a rapid buildup of bad loans consumed much of its earnings and narrowing interest income ate into its profitability.
Also on Monday, Agricultural Bank of China Ltd., the No. 3 Chinese lender, reported net profit climbed 4.9% in the quarter, the fastest pace in the past two years. That mirrored the net profit rise that China Construction Bank, China's second-biggest lender by assets, posted on Friday, citing higher interest and fee income.
The only exception of the Big Four was Bank of China Ltd., which only reported a 0.1% rise in profit, as it used much of its profit to lift its bad-loan provision by 63% from the year-earlier quarter.
"The Big Four banks are faring well as liquidity tightens and funding costs rise given their vast deposit bases," said Yulia Wan, a bank analyst with Moody's Investors Service. "But the banks with bigger reliance on the interbank market are under higher pressure in net interest margin."
In recent years, small Chinese banks have expanded aggressively with the help of interbank borrowing, outpacing their bigger rivals in terms of profit growth. An onslaught of regulatory measures has changed that, making it harder for them to borrow, which has slowed their expansion.
China Citic Bank, a midsized lender based in Beijing, reported a drop in both assets -- such as loans and investments -- and liabilities, chiefly deposits, as it was forced to scale back its interbank borrowing. Other small banks, including Ping An Bank, Shanghai Pudong Development Bank Co. Ltd. and Industrial Bank Co. Ltd. also reported slower growth in assets.
Interest margins across China's banking industry had narrowed following a series of reductions in the benchmark interest rates to stimulate economic growth in 2014 and 2015. The liberalization of deposit rates in the past few years also forced banks into fiercer competition for depositors.
Higher market rates helped stabilize big lenders' net interest margins -- the difference between interests received and paid by banks and a key measurement of Chinese lenders' profitability. Three of the big four banks reported wider net-interest margins in the third quarter; Agricultural Bank didn't disclose the margin. Small banks' margins generally narrowed.
Also a boon to China's banks, both big and small, was the Chinese economy's better-than-expected performance this year, which helped the balance sheets at companies, especially heavily-indebted industrial ones, and made them better able to service their loans. All Big Four banks reported lower bad-loan ratios compared with the end of last year.
China's top banking regulator said on the sidelines of the Communist Party congress earlier this month that regulation will tighten further.
"The continued regulatory tightening has curtailed the reliance on market funding for these smaller banks and is expected to continue exerting pressure on their profitability in the coming years," said Moody's bank analyst Yulia Wan.
Grace Zhu
(END) Dow Jones Newswires
October 30, 2017 08:26 ET (12:26 GMT)