A Chinese national flag flies in front of the China Construction Bank (CCB) Tower in Hong Kong's Central business district. Photo: Reuters / Tyrone Siu

Profit growth slowed at China’s 39 A- and H-share listed banks for the first half of the year, amid a growing ratio of credit and a fall in the rate of non-performing loans, according to PwC, in its review and report on the outlook for China’s banking industry released on Wednesday.

The aggregate net profit of the 39 banks was 849.72 billion yuan for the first six months, a 4.5% rise from a year earlier. Though net profits continued to grow across all four bank categories, including six large commercial banks, nine joint-stock commercial banks, 16 city commercial banks and eight rural commercial banks, most of them grew at a slower pace than during the same period last year.

“There was a slight increase – [0.12 percentage points] in the rate of growth among the large banks, but the growth is slowing down overall,” said James Tam, financial services partner at PwC Hong Kong. “There has been a marked drop-off from the previous rapid growth of city and rural commercial banks, [-8.09 and -6.01 percentage points respectively].”

All banks saw a compression in their net interest margin (NIM), a key measure of profitability, due to the switch from business tax to value-added tax. Significantly, city and joint-stock banks experienced a dramatic squeeze of around 40 basis points in their NIM.

By the end of June, the total assets of these banks amounted to 161.98 trillion yuan, a 4.21% increase from a year earlier. All the banks placed their assets primarily in loans, with a cutback in interbank assets due to regulatory measures taken over the past four months to fix “irregular banking activities”. Driven by mortgages, retail loans are growing faster than corporate loans, especially in joint-stock and city banks, where the figures recorded double-digit growth.

The non-performing loans (NPL) balance across the 39 banks increased by 4.24% to over 1,300 billion as of June, with an NPL ratio of 1.6%. But Raymond Poon, a financial services partner for PwC Hong Kong, felt this was a positive sign for the banks’ credit quality, as the NPL ratio actually fell a slight 0.05% compared to the level at the end of last year.

Financial services partners at PwC Hong Kong, James Tam, left, and Raymond Poon, right, released a review and outlook report on China’s banking industry on September 27, 2017. Photo: Asia Times / Lin Wanxia

For the second half of the year, “the overall banking industry will remain pretty stable, though they are facing different challenges”, said Jimmy Leung, from banking and capital markets at PwC China.

Large banks such as ICBC, CCB, ABC, BOC and BOCOM would continue to earn, but their non-performing loans remained the priority they must tackle. It was the same for rural banks, whose asset quality remained a concern, Leung added.

But joint-stock banks could be hit hard – PwC China was aware that some of their activities and transactions would be restricted by regulators in the coming months.

City banks, whose higher-than-average profitability heavily relies on investment, could be affected by the shrinkage of interbank business, which has been watched closely by regulators, with a focus on arbitrage.