China banks under reform pressure as profits slow

Chinese banks are under increasing pressure to reform under conventional business structures amid lackluster first-half profit data.

Net profits of the state-owned Industrial and Commercial Bank of China, the nation's largest lender, stood at 148.4 billion yuan (24.1 billion U.S. dollars) in the first half, up 7.2 percent year on year. However, the growth rate went down 5.2 percentage points from that a year ago.

Profit growth for the other four major state-owned banks, including China Construction Bank, Agricultural Bank of China (ABC), Bank of China, and the Bank of Communications (BOCOM), respectively stood at 12.65 percent, 10.97 percent, 9.17 percent, and 5.59 percent, which were all slower from a year earlier.

Analysts said the impact from interest rate liberalization and booming Internet finance has reduced banks' revenues from interest rate margins, a traditionally important source of profits for banks.

Even though interest rate margin-based revenues decreased during the first half, they remained a major power in generating profits for the banks. More than 70 percent of ABC and BOCOM's business revenues came from interest income.

Gone is the era where banks can gain easy and fat profits, said Zhao Xijun, vice president of the School of Finance under the Renmin University of China.

ABC Vice President Lou Wenlong said narrowing revenues from interest rate margins will force banks to diversify business and focus on non-interest sectors.

In contrast, smaller banks fared relatively better than the big banks. First-half net profits for China Merchants Bank and Shanghai Pudong Development Bank grew 15.94 percent and 16.87 percent, respectively.

China Merchants Bank said its non-interest income reached 28.3 billion yuan in the first half, up 87.7 percent year on year, as the company sought growth potentials in wealth management, credit cards, international factoring and letter of guarantee businesses.

According to the bank, its net non-interest income has accounted for more than 35 percent of its net business revenues during the period, up 10.5 percentage points from a year ago.

Meanwhile, Chinese banks were challenged with a rise in non-performing loan (NPL) ratios in the first half, with ABC's NPL ratio reaching 1.24 percent as of the end of June, the highest among the 16 banks.

Official data showed that the average NPL ratio in the country's banking sector was 1.08 percent by June, up 0.08 percentage points from the start of the year.