China's huge state banks are poised
to report strong profit growth for the first half in 2008,
thanks to wider margins and strong fee income, but funding
costs are expected to rise in the second half, eroding growth.
Chinese lenders are likely to face a harder time for the
rest of the year and beyond as customers lock up funds in time
deposits and move away from more profitable demand deposits,
and as a weak stock market dents enthusiasm for investing in
shares.
Asset quality is expected to deteriorate as property firms
are hit by Beijing's clampdown on borrowing and exporters are
squeezed by a weakening U.S. economy and higher costs. Banks
will also be without the incremental benefit of a lower tax
rate that kicked-in last year.
Robust loan growth, meanwhile, is slowing as Beijing has
taken steps to stave off economic overheating.
"We think this year's high earnings growth will not be
sustainable into next year," said Y.K. Lee, analyst at Core
Pacific-Yamaichi, who expects earnings growth next year to be
in line with that of China's nominal economic growth and has a
neutral rating on the sector.
"Next year the banks may face higher credit costs and that
may lower earnings growth," he added.
Even though profit growth at Chinese banks are seen to have
peaked during the first quarter, western banks such as Bank of
America (BAC.N) and Royal Bank of Scotland (RBS.L) are expected
to hang on to their holdings in the country's big lenders given
the strategic importance of China and high barriers to entry.
TOUGHER ROAD AHEAD
Some big Chinese banks have already pre-announced robust
first-half earnings, expecting bottom-line growth of over 50
percent due to net interest margin expansion, a lower tax rate
and strong fee income in an economy that grew by 10.4 percent
from January through June.
But such bumper outlooks may be scarce in the near future.
"The positive earnings revision cycle over the past 12
months looks to be ending as NIMs (net interest margins) are
reaching a plateau and credit risks are rising as China's
economy faces potentially greater-than-expected slowdown
risks," Citigroup analyst Simon Ho wrote in an August 14 note.
Industrial & Commercial Bank of China ()
(601398.SS), the world's biggest bank by market value, is
forecast to see a 44.7 percent rise in its second-quarter net
profit to 32.3 billion yuan, while first-half profit could rise
59 percent to 65.4 billion yuan, according to analysts
forecasts.
No.2 lender China Construction Bank () (601939.SS)
is expected to say first-half profit rose 70 percent to 58
billion yuan after it earned 32.1 billion yuan in the first
quarter.
Bank of China's () (601988.SS) profit growth is
expected to be the weakest among China's three biggest listed
banks because of its exposure to U.S. subprime-related
holdings, slower fee growth, higher loan impairment losses and
large presence in slower-growing Hong Kong.
China's top foreign exchange lender is expected to post a
38 percent increase in first-half profit and a 7 percent
year-on-year increase in second quarter profit, based on the
forecasts of six analysts polled by Reuters.
Citigroup expects Bank of China to book a second-quarter
provision for its subprime mortgage and Alt-A mortgage backed
securities (MBS) of 6.2 billion yuan after taking markdowns of
$2 billion (13.7 billion yuan) in the first quarter as the U.S.
housing crisis roiled global credit markets.
Bank of China is the mainland bank hardest-hit by exposure
to the U.S. subprime mortgage meltdown. In its 2007 full-year
results, it booked $1.58 billion in provisions and markdowns on
its subprime-related holdings, or less than 0.17 percent of its
total assets -- a tiny fraction compared to battered western
peers.
Western banks are seen hanging onto their holdings in
Chinese lenders after running up big paper gains, even as
three-year lockup periods on the sale of those investments
lapse.
"The odd bit of profit-taking, maybe, but I think the
stakes they've got are quite unique and they wouldn't be in a
rush to sell unless they were really financially stretched,"
said Warren Blight, banking analyst at Fox, Pitt-Kelton in Hong
Kong.
Bank of America recently increased its stake in
Construction Bank to nearly 11 percent, while Royal Bank of
Scotland has said it does not plan to sell its 5 percent
holding in Bank of China.
Other western institutions with sizeable Chinese bank
holdings include Citigroup (C.N), Goldman Sachs (GS.N), HSBC
(HSBA.L)(), and UBS (UBSN.VX)(UBS.N).
(US$1=HK$7.8=6.87 yuan)
(Editing by Kim Coghill)
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