China’s big banks set for hard slog as margins shrink

SHANGHAI/BEIJING: Four of China's so-called 'Big Five' state-owned banks have warned that profits will continue to be pressured in the second half of the year, as slowing growth in the world´s second-biggest economy hits borrowers and saps lenders´ margins.

Chinese banks, among the world´s biggest by market value, also face rising volumes of sour debt, forcing a quicker pace of write-offs - even as a series of rate cuts has chipped away at their interest income.

Industrial and Commercial Bank of China (ICBC) , Bank of China (BoC) , Agricultural Bank of China (AgBank) and Bank of Communications (BoCom) all warned of tough times ahead. BoC´s chief risk officer Pan Yuehan said the bank faces "relatively big pressure" in the near future, while ICBC´s chairman Yi Huiman said bad loans will continue to rise.

ICBC, the biggest bank by assets, and BoC reported near flat half-year profits on Tuesday, and shrinking net interest margins (NIM) - the difference between interest earned on loans and that paid out to depositors.

The lacklustre first-half - a far cry from the banks´ strong double-digit profit growth just two years ago - raises the prospect that the government will have to inject more than $100 billion to shore them up, some analysts have said.

ICBC´s Yi said the four biggest banks - ICBC, BoC, AgBank and China Construction Bank (CCB) - and four leading asset management companies would be included in a government debt-to-equity pilot scheme, which aims to let industrial firms convert their debt into equity stakes.

MARGIN SQUEEZEICBC´s margins narrowed to 2.21 percent at end-June from 2.28 percent a quarter earlier, while those at BoC slipped to 1.9 percent from 1.97 percent.

"Successive interest rate cuts and repricing of deposits and loans narrowed the interest spread," ICBC said in a statement on its earnings.  ICBC´s Yi said he expects the bank´s NIM to contract by 6-7 basis points in the second half, noting that each basis point drop costs more than 2 billion yuan in lost profit.