Anticipating the year to get worse, three of China’s “Big Four” state-owned banks cut their dividends Wednesday in an effort to preserve capital after reporting disappointing earnings.
Net interest margins (NIM) – the difference between a bank’s borrowing rate and interest earned on loans — also fell at all four lenders. The bank’s blamed their falling margins on interest rate cuts and rising non-performing loans among their highly-leveraged corporate borrowers and predict slower economic growth this year.
For the fourth quarter, Bank of China’s (BOC) profit rose 2% year over year to 39 billion yuan, making it the quarter’s big winner. China Construction Bank Corp (CCB) posted a 2.5% profit declined and Industrial and Commercial Bank of China (ICBC), the world’s biggest lender, reported profits were unchanged from the year-earlier period at 55.4 billion yuan ($8.55 billion).
China’s fourth big state-owned Bank — the Agricultural Bank of China — reports on Thursday.
“It’s really tough for commercial banks to make money,” BOC President Chen Siqing said at the Beijing news conference announcing the results. “China’s economy is challenged by big downward pressure, putting pressure on asset quality.”
Non-performing loans (NPLs) at Chinese banks have ballooned to a 10-year high of 1.27 trillion yuan, or 1.67% of the all loans outstanding at the end of last year, according to data from the China Banking Regulatory Commission.
The NPLs are a product of excessive lending during the government’s stimulus drive to revive economic growth. Even as the economy soured, most of the money went to industries that rapidly expanded into over-capacity. Now many of those loans are a risk of default.
With its NPL ratio rising to 1.5% at year-end from 1.44% in the third-quarter ICBC estimated NIM would fall by 20 basis points. This could results in ICBC’s profit falling 3.3% this year, said China Merchants Securities in a March research note.
CCB saw its NPL ratio hit 1.58% at the end of December from 1.45% at the end of September. Meanwhile, BOC’s remained flat.
“Cutting dividend is the most logical thing to do given all that is happening,” Benjamin Chang, CEO of Hong Kong-based LBN Advisers, which manages about $400 million told Reuters. “People are expecting the bad debt issue to deteriorate.”