By Cheng Leng and Engen Tham
BEIJING/SHANGHAI (Reuters) - China's banks face pressure on earnings and asset quality in the coming months as interest rate reforms squeeze margins and a Sino-U.S. trade war adds to economic uncertainty.
Five of the nation's top listed banks this week reported a profit rise of nearly 5% in the first half of the year, but some warned they faced headwinds.
"In the second half of this year, the domestic and global economy is becoming increasingly complex and changeable, bank asset quality will continue to face pressure," Agricultural Bank of China Ltd (AgBank) (SS:601288) (HK:1288) Vice President Wang Wei said at a press conference on Friday.
His comments come on the heels of a similar warning from the president of Industrial and Commercial Bank of China (ICBC) (HK:1398) (SS:601398), the world's largest commercial lender.
"The trade war causes uncertainty, and there is downward pressure on the economy," Gu Shu, president of ICBC, said on Thursday after his bank posted a 4.7% rise in profit.
AgBank and Bank of China Ltd (BoC) (SS:601988) (HK:3988), the country's No.3 and No.4 lenders by assets, turned in 5% rises in first-half profits on Friday.
Bank of Communications (BoCom) (SS:601328) and China Construction Bank (CCB) (SS:601939) both saw their profits rise 4.9% over the six months ended June.
"We expect margin pressure in the second half of the year," said Ray Heung, senior vice president of the Financial Institutions Group at Moody's Investors Service.
He said a government drive to encourage banks to lower lending rates, including through its reform earlier this month of the loan prime rate (LPR), was putting pressure on earnings.
Banks need to fix rates on new loans with reference to the LPR, which is now set under a revamped mechanism designed to help lower borrowing costs for companies.
ICBC's president said LPR reform would have a limited impact on his bank's net interest income, adding about 48% of ICBC's new loans in the first half had already referenced that rate.
But the bank's results showed it faced a squeeze, posting a fall in net interest margin, a key gauge of profitability, to 2.29% at end-June from 2.31% at end-March.
Hou Weidong, vice-president of BoCom, told an earnings briefing that "China's commercial banks are facing a great amount of pressure on asset quality".
Like ICBC, BoCom and CCB saw their NIMs drop from end-March levels, while BoC's NIM remained steady. AgBank reported a drop in NIM versus end-December.
"Banks are expected to focus on lending to build up their assets in the second half of the year, but the growth of lending will be constrained or remain stable due to risk appetite," Liu Zhiping, banking analyst at Ping An Securities, said, predicting net interest margins would shrink further.
"The overall performance of the sector will continue to fall, and the valuation on Chinese banks will be under pressure," he added.
NPL RATIO
By end-June, the non-performing loan (NPL) ratio for China's banking sector reached 1.81%, the highest since 2009, data from the China Insurance and Banking Regulatory Commission showed.
But all five banks reported steady or falling NPL ratios.
"The main challenge is how to maintain asset quality as the macro economy slows," CICC analyst Victor Wang said of the outlook for China's banking sector.
The biggest banks have already been enlisted to rescue their smaller brethren, who have faced a liquidity crunch as well as the effects of slower economic growth, exacerbated by a crippling Sino-U.S. trade war.
ICBC said in July it planned to spend up to 30 billion yuan ($4.23 billion) on a 10.82% stake in troubled Bank of Jinzhou, which struggled to report 2018 results after its auditor refused to sign off on them and resigned. In May, CCB took charge of Inner Mongolia-based Baoshang Bank.