China's top banks to post modest Q1 growth as bad debts bite

China's top banks to post modest Q1 growth as bad debts bite

BEIJING, April 25 (Reuters) - China's five biggest banks are expected to report sluggish profit growth in the first quarter, continuing a trend of the past eight quarters, as a slowing economy and mounting bad loans squeeze margins.

The outlook on profits is unlikely to improve soon, with the banking regulator and analysts warning of pressure on asset quality and also, net interest margins - in part due to consecutive interest rate cuts and interest rate reform.

The world's biggest lender, Industrial and Commercial Bank of China , is expected to post a tiny 0.18 percent rise in March quarter profit on Thursday, extending a streak of falling or single-digit profit growth in the last couple of years, according to brokerage estimates compiled by Thomson Reuters.

Other large Chinese banks, including Agricultural Bank of China and Bank of Communications , are expected to follow suit. Bank of China will be the first of the Big Five banks to report on Tuesday.

Profit for the large banks could range between 1 percent and 6 percent in the first quarter mainly as a result of a pick-up in credit demand after recent interest rate cuts, Edmond Law, banking analyst at UOB Kay Hian (Hong Kong), said.

"The concerns are still on asset quality and net interest margins," said Law, who expects, however, asset quality deterioration to continue in the second half.

China's central bank Vice Governor Chen Yulu said on Sunday financial institutions were facing increasing credit risks, and that factors that influenced financial market stability were also on the rise amid the economic downturn.

Troubled lending for the Chinese banking system totalled 4.16 trillion yuan ($642 billion) at the end of 2015, of which a quarter were non-performing loans (NPLs), according to the China Banking Regulatory Commission.

"Bottom line contraction is likely if non-performing loans continue to grow and provision coverage isn't relaxed," said Patricia Cheng, bank analyst at brokerage CLSA in Hong Kong.

Chinese banks are required to set aside funds equivalent to at least 150 percent of bad loans to cover losses, and bankers have said a cut in loan loss provision requirements would have the most immediate impact on financial statements.

Net interest margins - the difference between borrowing rate and interest earned on loans - is expected to fall by 20 basis points year-on-year for the big banks, according to Daiwa Capital Markets' Leon Qi.

To address the strain on bank capital reserves, China's policymakers have introducing new measures, including debt-for-equity swaps and the securitisation of NPLs.

However, analysts say a turnaround in the near term is unlikely.

The big lenders will face pressure over the next 12 to 18 months and leverage will continue to rise, said Minyan Liu, an associate managing director at Moody's.

"Chinese banks have used their loan-loss reserves to deal with increasing asset-quality problems, which reduces the impact on their earnings and protects their capital base," Liu said. "However, their cushion has become thinner."

($1 = 6.4765 Chinese yuan) (Additional reporting by Sumeet Chatterjee in Hong Kong and Gaurav Dogra in Bengaluru; Editing by Lisa Jucca and Jacqueline Wong)

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