Agricultural Bank of China issues profitability warning even as it posts higher-than-expected interim gain
One of China's biggest banks has issued a warning about slimmer net interest margins even as it reported a higher-than-expected interim profit, as the world's second-largest economy grapples with slowing growth and a property crisis.
Agricultural Bank of China (ABC), the country's third-largest commercial lender with total assets worth 38.03 trillion yuan (US$5.22 trillion), on Tuesday posted a 3.9 per cent year-on-year gain in net profit to 133.83 billion yuan in the six months ending on June 30. The lender beat expectations of a 2.6 per cent increase to 132.3 billion yuan by analysts polled by Bloomberg.
The bank's non-performing loan (NPL) ratio, a measure of its exposure to delayed or missed loan payments that could dent profits, fell to 1.35 per cent compared with 1.37 per cent last December.
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"Given the current trend of economic recovery in China, and as we are responding to the regulator's call to reduce financing barriers for the real economy ... [these factors] combined with a potential cut to existing mortgages in the near future, our net interest margins might face further pressure in the second half of this year," Fu Wanjun, ABC's president, said in a post-earnings press conference on Tuesday. The net interest margin is the amount of interest a bank earns on loans compared to the amount it pays on deposits.
ABC's results come amid a persistent downturn in China's property sector, exemplified recently by a slew of missed bond payments by real estate giant Country Garden. This downturn poses a threat to the country's banking sector.
Goldman Sachs forecast recently that real estate distress could trigger 1.9 trillion yuan of credit losses, based on a 10 per cent loss rate from the recent cracks in the bond market. Banks could suffer losses of 1.2 trillion yuan, or 61 per cent of the total, it added.
ABC is already feeling a strain on its profitability: it reported a net interest margin of 1.66 per cent, a sharp decline from 2.02 per cent a year ago.
The Beijing-based bank reported property-related bad loans worth 51.69 billion yuan, as well as bad residential mortgage loans worth 26.71 billion yuan.
China Construction Bank (CCB), another major state-owned lender that disclosed its interim results last Wednesday, in comparison, reported 39.6 billion yuan in real estate-related bad loans. CCB's net interest margin declined 0.3 per cent year on year to 1.79 per cent.
While Beijing is calling on major state-owned lenders to provide financing support to property developers and revive demand, it has also signalled its determination to protect bank margins and prevent the property crisis from spilling over into the broader finance sector.
The People's Bank of China last week surprised markets with a lower-than-expected cut to the short-term loan prime rate, while leaving its key mortgage benchmark lending rate unchanged.
Other major state-owned commercial banks, including Bank of China, Bank of China (Hong Kong) and Industrial and Commercial Bank of China, will release their interim earnings on Wednesday.
ABC shares rose 2.7 per cent to close at HK$2.67 on Tuesday evening. The broader Hang Seng Index advanced 2 per cent.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.
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