Biggest China Banks Grind Out Meager Profit Gains as Loans Sour

(Bloomberg) -- China’s biggest banks are grinding out meager profit gains as they grapple with pressure from loans going bad.

Agricultural Bank of China Ltd. on Friday posted a 0.5 percent increase in net income in the second quarter from a year earlier. China Construction Bank Corp. reported earlier in the week a 0.9 percent gain, while Bank of Communications Co.’s profit rose 1.3 percent.

The other two lenders in the big five -- Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. -- are due to report this week.

Amid the limited profit gains, some lenders announced plans for new fundraisings. Agricultural Bank said on Friday that it would sell as much as 80 billion yuan ($12 billion) of Tier-2 securities over three years, while mid-sized China Citic Bank Corp. on Thursday announced plans to raise as much as 40 billion yuan selling convertible bonds.

While Xu Yiming, the chief financial officer of Construction Bank, told a briefing in Hong Kong on Friday that his bank was seeing less pressure from bad loans, Agricultural Bank Chairman Zhou Mubing told reporters in Beijing that the opposite was true for his organization.

Regulatory Minimum

All three banks kept their ratio of provisions for bad loans above a regulatory minimum of 150 percent of existing soured credit.

Agricultural Bank reported that its nonperforming-debt ratio edged up to 2.4 percent from 2.39 percent in the previous three months. Construction Bank and Bank of Communications Co. both earlier reported that their bad-loan ratios held steady in the second quarter.

Bank of Communications executives cautioned that it was too early to say the worst was over for nonperforming loans.

While bad-debt risks are “controllable,” the situation remains severe, President Peng Chun said at a briefing last week in Shanghai. Yang Dongping, the lender’s chief risk officer, said that nonperforming loans were rising faster in some places -- such as Shandong, Tianjin and Fujian -- than others.

China’s tools for tackling leverage and a build-up of bad credit include debt swaps with local governments, plans for banks to swap loans for equity stakes in companies, and a trial of NPL-backed securities. Agricultural Bank last month sold securities backed by 10.7 billion yuan of nonperforming loans.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net. To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Paul Panckhurst

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