Regulatory Crackdown Helps China’s Big Four Banks Beat Profit Expectations

All of China’s big four state-owned banks have posted second quarter profits ahead of consensus estimates, as an ongoing regulatory crackdown raises interbank funding costs and widens net interest margins.

The latest figures from the China Banking Regulatory Commission indicate that banking sector profits saw a year-on-year increase of 7.9% in the first half of 2017.

Out of China’s big four banks ICBC led second-quarter net income in terms of scale at 77.2 billion yuan, as compared to 75.45 billion yuan for the same period last year, followed by China Construction Bank, with net earnings of 68.33 billion yuan as compared to 65.99 billion yuan a year previously.

Bank of China came in third place, with second quarter net income of 57.04 billion yuan as compared to 46.42 billion yuan for the second quarter of 2016, while Agricultural Bank of China’s figures were 52.9 billion yuan and 50.46 billion yuan respectively.

The substantial year-on-year profit increase arrives amidst a concerted crackdown on the finance sector by Chinese regulators, as well as an ongoing deleveraging campaign aimed at combating shadow banking and reducing systemic risk.

The financial crackdown may have abetted the performance of the Big Four banks by tightening liquidity on the interbank market, pushing the cost of funds to their highest levels in two years, and widening net interest margins for well-positioned lenders.

ICBC’s net interest margin increased to 2.16% by the end of the first half from 2.12% in March, while for Bank of China NIM rose to 1.88% from 1.8% across the same period, and CCB’s margin increased to 2.14% from 2.13%.

The financial crackdown may have also boosted the performance of the big four banks – who jointly control 40% of Chinese deposits and possess a vast network of branches, by curbing shadow banking and increasing demand for conventional loans.

Central bank data indicates that a record-breaking 8.2 trillion yuan in new loans were extended across the first half for a year-on-year increase of 12%, as regulatory measures stymied key segments of the shadow banking sector such as interbank certificates of deposit and wealth management products. 

CBRC data further indicates that non-performing loan levels have remained stable across the banking sector for three consecutive quarters, while all four of the big four banks posted declines in their NPL ratios across the first half.

Bank of China saw a decline to 1.38% in June from 1.46% in December, while ICBC reduced its NPL ratio to 1.57% from 1.62% across the same period.

ABC saw its NPL ratio fall to 2.19% from 2.37%, while for CCB the ratio edged lower to 1.51% from 1.52%.

 

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