Date
20 September 2017
Net interest margin at mainland banks is under pressure from recent central bank measures, Judy Zhang says. Photo: HKEJ
Net interest margin at mainland banks is under pressure from recent central bank measures, Judy Zhang says. Photo: HKEJ

Higher bad debt, lower profit growth seen at mainland banks

China’s slowdown in economic growth is likely to result in higher levels of bad debt and lower profit growth at mainland banks, a director at BNP Paribas Securities (Asia) Ltd. said.

However, their share prices have factored in the negative outlook, so there remains little room for downward corrections the Hong Kong Economic Journal reported Monday, citing Judy Zhang in an interview.

Zhang therefore sees opportunities for bottom-fishing in the financial sector. 

Bank of Communications Co. Ltd. (03328.HK) and China Minsheng Banking Corp. Ltd. (01988.HK) are among her top picks.

In view of the banking regulator’s policy on speeding up the recognition of bad debts and making impairment provisions for them, mainland lenders’ non-performing loan ratios are likely to peak out next year at an average level of below 2 percent, Zhang said.

“Yet, taking into account certain bad debts that can only be classed as special-mention loans — as lenders are unable to write them off because of pressure from local governments — these problematic loans may amount to 3.5 percent to 4 percent of the total,” she said.

At the end of September, the average non-performing loan ratio of mainland banks reached a four-year high of 1.16 percent, and the outstanding amount had risen for 12 consecutive months to 766.9 billion yuan (US$124.71 billion), China Banking Regulatory Commission data showed.

The People’s Bank of China’s recent reduction of the interest rate for loans and broadening of the band of interest rates for deposits will also weigh on mainland banks’ net interest margins and profit levels, Zhang said.

She expects the measures to result in a 210-basis-point (2.1 percentage point) drop in net interest margin and a 12 percent fall in profits on average. 

Zhang forecasts that profit growth at mainland banks will slow down to 5 percent next year from the high single digits this year.

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VW/JP/FL

Freelance journalist

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