China banks warn of rising bad loans and falling margins as economy slows

Recent economic indicators show that even the Chinese growth target of about 7% may be at risk

China's largest banks warned of a tough year after posting their weakest half-yearly profit growth in at least six years as a slowing economy forces the lenders to make even more provisions for soured loans and squeezes interest income.

State-owned Industrial and Commercial Bank of China (ICBC), China's largest bank by assets, and peers Bank of China (BOC), Agricultural Bank of China and Bank of Communications this week reported another spike in bad loans in the first half and net profits that grew at most by 1.5 percent, a far cry from the double- digit growth banks enjoyed after the 2008 financial crisis.

With China's economy set to grow at its weakest pace in a quarter of a century this year, the lenders said they were bracing themselves for even more bad loans as industries ranging from steel to petrochemicals and property struggle.

"We will continue to face pressure from non-performing loans for a period of time," ICBC President Yi Huiman said.

The bank, also the world's largest bank by assets, increased provisions for troubled loans by 74 percent from a year ago in the first half.

In addition to increasing bad loans, China's slowing economy raises the likelihood of more interest rate cuts, which would further pressure the banks' net interest margins (NIM), the spread between the lending and borrowing rates that banks earn.

BOC, the country's fourth-biggest lender, said on Friday it faces margin pressure in the second half of the year from interest rate liberalisation.

The People's Bank of China has cut interest rates five times since November, and in the first-half all the banks reported lower NIMs.

Recent economic indicators show that even the Chinese growth target of about 7 percent may be at risk. Turbulence in China's stock markets and the recent devaluation of the yuan may also end up pushing more manufacturers, construction firms and retailers into delaying or defaulting on loan repayments.

One bright spot for the banks this year has been their fee-generating businesses, but the volatility in the stock market rout is set to curb income from these services too.

"Given the tough pressures of the downturn, the banking industry will face an austere operating environment," BOC said in its earnings statement.

China Construction Bank, the nation's second-biggest, will announce its interim results on Sunday.

($1 = 6.3860 Chinese yuan renminbi)