Big Four Banks Show Signs of Stabilization in First Quarter

(Beijing) — Shares of China’s big four state-run banks dipped slightly in Hong Kong trade on Tuesday, after the group reported results that showed their bad loans were stabilizing and profits and assets increased modestly.

Hong Kong-listed shares of the big four fell from by 0.2% for Industrial and Commercial Bank of China (ICBC), to a 0.8% decline for Agricultural Bank of China, the nation’s largest and third largest banks by assets. China Construction Bank dipped 0.3%, while Bank of China was down by 0.5%.

“From an industry perspective, operational trends seem encouraging on asset quality, margin, capital and balance sheet growth side,” research house Jeffries wrote in a note on the overall sector, which finished reporting its quarterly results at the end of last week. “However, it is very clear that (the first quarter) is just the beginning of sector divergence, as weak franchise banks meaningfully underperformed the strong ones on margin and revenue.”

Investors have closely watched the big four banks in recent years for signs that their bad loans were stabilizing, after a government-directed lending binge in the years immediately after the global financial crisis caused their bad debt to rise.

After creeping up for the last few years, non-performing loan (NPL) ratios for three of the big four banks inched downward by the end of March from levels at the end of 2016. The lone exception was China Construction Bank, whose NPL ratio remained steady at 1.52%.

At the same time, three of the four banks reported their operating profits rose anywhere from 2% for China Construction Bank to 8% for Agricultural Bank. The lone exception was ICBC, whose operating profit was flat. But while those banks showed signs of stabilization, the situation may still be deteriorating for smaller regional banks, Jeffries said.

“Though we remain positive on China’s banking sector due to the stabilizing economy and hence lower asset quality pressure, tightening regulation is having an impact on banks with weak fundamentals,” it said in a separate note. As a result, it lowered its earnings forecasts and target prices for four smaller banks, including Bank of Communications, China Citic Bank Corp. and China Minsheng Banking Corp.

Contact reporter Yang Ge (geyang@caixin.com)