Profits near flat at China's Bank of Communications, AgBank; pressures persist

Two of China`s `Big Five` lenders, Bank of Communications (BoCom) and Agricultural Bank of China (AgBank), reported modest annual profit growth on Tuesday, as they battled operating pressures and the narrowest net interest margins since at least 2011.

China`s central bank cut benchmark interest rates six times in 2014-15 in a bid to revive a slowing economy, but that dragged down margins - a key gauge of profitability for lenders.

Analysts see this trend extending into 2017, adding to the challenges in a sector already grappling with a pile-up in bad debts to the highest level in a decade. 

The pressure on assets will be strong this year and there will be a rise in sour debts, c, president of BoCom, China`s fifth-largest listed commercial bank by assets, said at an earnings briefing in Hong Kong.

BoCom and AgBank, posted a 1% and 1.9% rise in 2016 profits, respectively, helped by loan growth and declining tax burdens, to just beat fourth-quarter (Q4) consensus estimates.

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For the full year, BoCom earned 67.21 billion yuan, up from 66.53 billion yuan in 2015, while AgBank`s annual net profit grew to 183.94 billion yuan from 180.58 billion yuan.

At AgBank, growth was supported by a 10% rise in net fee and commission income to 90.9 billion yuan, and a 15% drop in its tax expenses.

Net interest margins - the difference between interest paid and earned - eased to 1.88% at BoCom and 2.25% at AgBank at the end of 2016, their lowest since at least end-2011.

Soured Debt 

Both BoCom and AgBank, China`s No 3 listed commercial bank by assets, saw a small reprieve in non-performing loan (NPL) growth last year, highlighting their efforts to clean up bad debt from their balance sheets.

The lenders` NPL ratios showed a slight improvement, with BoCom`s easing to 1.52% by end-December from 1.53% at end-September, and AgBank`s at 2.37% versus 2.39%.

"Asset quality is still the biggest problem for management. We couldn`t possibly place it as the second more serious concern," said Peng.

Loan growth at both banks was driven in part by mortgage loans, despite Beijing`s continued clampdown on an overheated property market.

At BoCom, mortgage loans grew 27.45% year-on-year to 770 billion yuan in 2016, while at AgBank they jumped by almost a third to 2.56 trillion yuan. 

"Tightening regulation, fiercer competition, inadequate credit demand and continuing risk exposures," will continue to weigh on the banking industry, AgBank Chairman Zhou Mubing said in his earnings statement.

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