The bad-loan challenge for China’s biggest banks, which worsened steadily over much of the first half of the decade, may finally be easing.

Earnings reports this week from Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd. showed that their provisions for losses on bad loans stabilized last year, helping them to post higher-than-estimated profits.

The lenders’ bad-loan ratios either declined or, in ICBC’s case, held steady, a sign that the banks benefited from a rebound late last year in the world’s second-biggest economy. That’s a welcome change for an industry that has been contending with loan defaults, narrower margins and tighter regulations on mortgage lending and off-balance sheet wealth-management products.

“We have started to see signs of stabilization and slight improvement in ICBC’s asset quality,” the bank’s Chairman Yi Huiman said at a press conference in Beijing on Thursday. “I believe our asset quality will be better in 2017 than 2016. As the Chinese economy recovers, the external operating environment for banks is also improving.”

His bank and its two rivals reported combined loan-loss provisions of 262.2 billion yuan ($38 billion) for 2016, little changed from the previous year, exchange filings show. That’s a stark contrast to the 43 percent increase in charges in 2015 from 2014 -- during which the lenders saw their bad-loan ratios soar as the nation’s economic growth cooled.

Construction Bank reported Wednesday an end-2016 NPL ratio of 1.52 percent, down from 1.56 percent in September and 1.63 percent in June, according to exchange filings. Agbank’s level slipped to 2.37 percent by December from 2.39 percent three months earlier, while ICBC was unchanged at 1.62 percent.

Lower Expenses

The full-year earnings posted by the three lenders all beat analyst estimates thanks to cost reductions and the lower-than-expected charges for bad loans. Their combined provisions for 2016 were more than 20 billion yuan below the amount expected by analysts in a Bloomberg survey.

Shares of ICBC closed 1 percent lower in Hong Kong on Thursday, before its results were published. Construction Bank dropped 1.3 percent, while Agricultural Bank lost 0.6 percent.

Four of the five largest Chinese banks have now released their 2016 results. Bank of China Ltd. publishes its results on Friday. Going into this reporting season, analysts had expected the five lenders to post their first decline in combined annual profit since 2004, but the numbers so far already indicate a better overall outcome.

Some analysts remain cautious on reading too much into the improved NPL figures, amid mixed views on whether China’s economy can sustain its fourth-quarter revival.

Worse Picture

“The improving asset quality at banks naturally reflects the economic rebound last year,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “The rebound is probably peaking and we will likely see a worse picture in asset quality a year from now.”

Robust consumption and a manufacturing rebound helped China’s economy grow a faster-than-estimated 6.8 percent in the fourth quarter. Still, the full-year expansion of 6.7 percent was the slowest since 1990, and economists in a Bloomberg News survey expect growth to weaken to 6.5 percent this year and 6.2 percent in 2018.

The head of Bank of Communications Co., China’s No. 5 lender, offered a more cautious assessment of nonperforming loans on Tuesday, even after his firm revealed an end-2016 bad-loan ratio of 1.52 percent -- down slightly from 1.53 percent in September.

“What’s positive to us is different nonperforming-loan indicators dropped during the period, meaning our risk control measures were efficient,” Bocom President Peng Chun told reporters in Hong Kong after his bank’s results. “What worries us is that the pressure is huge. I think for our new nonperforming loans, it’s hard to say they have peaked.”

Source:
courtesy of BLOOMBERG

by Bloomberg News

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