|01 November, 2019

China's banking heavyweights flex fee muscles

Four out of the so-called Big Five state-controlled outfits beat market expectations

Investors look at computer screens showing stock information at a brokerage house in Shanghai, China May 6, 2019.

Investors look at computer screens showing stock information at a brokerage house in Shanghai, China May 6, 2019.

REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - It's good to be big in the People’s Republic. Earnings from state-owned giants like $288 billion Industrial and Commercial Bank of China and others delivered pleasant surprises in the last quarter, despite economic malaise, rate cuts and loans to riskier borrowers. In part, that’s down to fees, which mega-lenders have been able to hike this year.

Four out of the so-called Big Five state-controlled outfits, including ICBC, Agricultural Bank of China , China Construction Bank , and Bank of Communications , beat market expectations. ICBC, the world's largest lender by assets, last Friday reported its best third-quarter profit rise in five years. Non-performing loan ratios were flat or fell at all of them, even as the country’s growth cooled to its slowest pace in nearly 30 years.

Part of the reason was the surge in credit volume in September: new yuan loans came in at 1.7 trillion yuan ($241 billion), led by a 350 billion yuan bump in corporate lending. That might not be sustainable or desirable in the long term - some of it was generated by private companies turning bond liabilities into loans. And net interest margins contracted, squeezed by central bank efforts to push down the cost of credit.

However, the giants also managed to boost earnings through a sustained rise in non-interest income.

In 2017 and 2018, a crackdown on shadow banking denied most lenders the easy money they had earned by facilitating entrusted loans and reselling wealth management products. Fee and commission growth for the banks rated by Moody's slowed to a meagre 0.2% in 2017 from over 8% a year earlier. But that has revived significantly this year: charges rose 12% in the first half of 2019. At ICBC, for example, non-interest income rose by 13% in the last quarter, nearly double the rate of interest income growth.

The trend undercuts Beijing's campaign to lower borrowing costs. The big boys can get away with it, though, thanks to national networks, quality clients, and a wider variety of fee-based services. Smaller banks, who once thrived on shadow banking, are far less flexible: their continued travails show it.

CONTEXT NEWS

- State-owned Bank of China posted a 3% year-on-year rise in third-quarter net profit on Oct. 30, while China Construction Bank recorded an estimate-beating 6% increase.

- The results are in line with the remaining "Big Five" centrally controlled lenders. Industrial and Commercial Bank of China, Agricultural Bank of China, and Bank of Communications all reported estimate-beating third-quarter profit growth earlier in the month.

- All five lenders said their non-performing loan (NPL) ratios were steady or had fallen. ICBC's edged down to 1.44% at the end of September from 1.48% at the end of June, while the other four lenders posted steady ratios. The NPL ratio of China’s banking sector as a whole is at its highest level since the global financial crisis.

(Editing by Clara Ferreira Marques and Sharon Lam)

© Reuters News 2019

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