No surprise here: decelerating economic growth and bad debt are taking a toll on profitability at China’s largest banks leading them to slash payouts to shareholders. This comes at a time when rate cuts are increasingly likely to eat away at NIM, effectively squeezing banks from both sides. Here's a look at the dramatic upswing in NPLs over the last four years:
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And here’s more from Bloomberg [10]:
Three of the nation’s four largest banks, including Industrial & Commercial Bank of China Ltd., this week cut their payment ratios for 2014 by the most in three years. ICBC’s fell to 33 percent from 35 percent a year earlier. The smaller China Citic Bank Corp. last week eliminated its payment altogether.
Rising charges for bad debts -- ICBC more than doubled provisions in the fourth quarter -- are cutting profits just as regulators require banks to hold extra capital. The average gain in net income for four of the five biggest banks -- ICBC, Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. -- was 6.7 percent, the weakest in more than a decade, their results showed this week.
“The new normal for the Chinese economy and banking sector includes sluggish growth and persistent credit deterioration,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd., said in a note on Friday. He sees the biggest banks’ payout ratios gradually dropping to 30 percent, the minimum allowed for state-owned enterprises.
Particularly hard hit is ABC, which saw its non-performing loans jump 25bps Q/Q, but the more disconcerting thing to note is that NPLs for loans made to manufacturers more than doubled that number, rising 54bps sequentially:
Here’s Barclays on the bank’s recently released 2014 results:
ABC reported 2014 net profit of RMB 179.5bn (+7.9% y/y), 2.7% lower than the Bloomberg consensus of RMB 184.4bn. Meanwhile, 4Q14 profit growth turned negative on fast expense growth partly contributed by provision for off-balance sheet items. The bank’s asset quality deteriorated quickly, with NPL ratio rising by 25bps q/q to 1.54%, mainly attributed to manufacturing and wholesale & retail sectors; the faster-than-expected growth in NPLs is a major concern going forward, in our view. In addition, the bank slightly cut the payout ratio to 33% for 2014 from 35% for 2013 due to the needs for future business development and anticipation of lower earnings growth amid slowing economy, according to the bank.
ABC’s asset quality showed significantly increased pressure in 4Q14, as NPLs grew by 20.8% q/q lifting the NPL ratio by 25bps q/q to 1.54%. The deterioration was mainly the result of corporate loans, the NPL ratio of which increased by 42bps h/h from 1.58% to 2.00% by end-2014. In particular, manufacturing (impact by default of some large SOEs) and wholesale & retail were among the sectors most hit, whose NPL ratios increased by 54bps/275bps h/h, respectively, to 3.69%/5.93% by the end of 2014.
Note that if this week's contraction-territory PMI print is any indication (and we think that it likely is), this will get far worse before it gets any better. Recall that the March composite came in at 49.2 with nearly every sub-sector decreasing:
NPLs are also on the rise at ICBC:
Here’s Barclays on ICBC’s results and the outlook for asset quality and NIM:
ICBC reported net profit of RMB 275.8bn for 2014 (+5% y/y), 1% below the Bloomberg consensus. Net profit in 4Q14 was RMB 55.3bn, -3% y/y. The NPL ratio increased by 7bps q/q to 1.13% as of end-4Q14, and ICBC believes that the macro environment will remain challenging in 2015. Its NIM was 2.66% for 2014, up 8bps y/y, but management expects that the previous two benchmark rate cuts could reduce margin by 12bps in 2015. The dividend payout ratio was cut to 33%, in line with its large peers…
The bank’s NPLs increased by 8% q/q in 4Q14 while its NPL ratio increased by 7bps q/q to 1.13%, mainly due to rising NPLs in manufacturing sector..
Going forward, the bank expects that the previous two benchmark rate cuts could reduce its 2015 NIM by -12bps.
The bank is seeing heightened distress among coal companies and as we noted on Thursday, the country’s shift towards cleaner energy is likely to hit industrial production by 20% or more. Here’s Bloomberg again:
For ICBC, the world’s biggest bank by assets, the level of nonperforming loans is worst in the Pearl River Delta, the traditional heartland of Chinese exporting, where 1.64 percent of loans had gone bad by the end of last year. A jump in defaults in the nation’s west was mainly connected with struggling coal companies, the lender said in an annual result released on Thursday.
And more from WSJ [11]:
China’s major banks last year wrote or spun off more than twice what they did in 2013 to keep the fallout from a slowdown in China’s economy from lingering on their balance sheets. As a result, the biggest continued to report nonperforming loan ratios close to 1%, an enviable level in the banking world.
But the write-offs show the problems facing China’s financial system. The world’s No. 2 economy posted its slowest growth in more than two decades last year, and many local government and big state-owned companies are still grappling with the hangover from China’s post-2008 lending binge. A further slowdown could hit the lenders even harder this year, as they face letting bad loans rise or pursuing more write-offs that would further crimp profit growth…
In 2014, China’s four biggest banks—Bank of China Ltd., Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd. and CC—wrote off and transferred out 128.98 billion yuan in loans last year. That marks a surge from 2013, when they wrote off 52.11 billion yuan. Compared with nonperforming loans they kept on their books, 2014’s write-offs came to about one-quarter of the size, compared with 15% in 2013.
Even without last year’s write-offs, nonperforming loans ratio of all four big four banks would have remained below 2%, but the banks flagged that they expect the quality of their assets to continue to sour.
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Of course, shares in the nation's largest banks have rallied along with the rest of the market over the past 8 months and with NPLs rising thanks to defaults on loans to a manufacturing sector that's now in contraction coupled with the expectation of squeezed margins, we wonder if selling pressure lies ahead:
