Profit growth at China’s big banks slows significantly

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/14

Three of the four giant, largely state-owned banks that dominate China’s banking sector reported lower profit growth last year. Growth in profits of Industrial and Commercial Bank of China (ICBC) slowed from about 10 % in 2013 to 5 % in 2014. The Agricultural Bank of China (ABC) reported profit growth down from 15 % to 8 % and the Bank of China (BoC) down from 12 % to 8 %. Other Chinese banks, including China CITIC Bank and China Minsheng Bank, also reported lower growth in profits.

Lower bank profit growth reflects China’s slowing economy and an increase in non-performing loans, of which all large banks reported. Still non-performing loans only accounted for 1.3 % of the total credit stock at the end of last year. The largest banks are expected to weather increases in non-performing loans better than smaller banks. Among the major banks, only ABC has a larger-than-average non-performing loan portfolio.

The slowdown in profit growth is also an indication that banks are preparing to the increase in non-performing loans and have had to increase their provisions. By some estimates, the actual stock of non-performing loans is considerably larger than the figures banks report. Growth in the stock of non-performing loans is still expected to continue with the economic slowdown and unwinding of unprofitable businesses. This trend is evidenced by the drop in profits of industrial firms, which started late last year. The profit slide has accelerated this year.

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