Big Four have a bad year

The Big Four could see profitability plunge to 5%.

China's four largest state-owned banks could see profit growth plummet to a miniscule 5% this year from an average of over 20% the past few years. That would be the weakest growth since the banks began trading in 2005.

The worrisome estimate comes despite Agricultural Bank of China and Bank of China exceeding third-quarter profit expectations, helped by the central bank’s decision to allow lenders to set their own loan rates. International Commercial Bank of China, the country's largest lender, said it expects net interest margins to fluctuate around current levels or about 2.7%.

Rate cuts by the People's Bank of China, the central bank, have brought with it lower margins. This drop in profitability will be felt most keenly by smaller banks which have no choice but to compete with the Big Four by offering cheaper loans.

The problems of smaller banks will also be worsened by a scramble for deposits after the central bank gave banks more leeway in setting their own deposit rates, on top of loan rates.

“None of them have enough market share to have the ability to fix interest rates,” said Jim Antos, an analyst at Mizuho Securities in Hong Kong.

The rosy third quarter earnings growth posted by the Big Four would have been smaller if they had taken bigger impairment charges by putting aside more funds as provisions for bad loans. By cutting back on provisions, a larger part of a bank’s revenue can be counted as profit.

Bank of China would have seen its earnings slashed by HK$2.5 billion in July-September if it had set aside more funds to cover potential bad loans. ICBC reduced impairment charges by about 1.9 billion yuan in the quarter from a year earlier.

On average, China’s banks set aside 50 basis points of their loan books as impairment charges. A basis point is 0.01%.