City and village banks saw net profit grow 13.7% compared to 4.8% for the Big 4.
The net profit of the Chinese banking sector rose 7.06% YoY in the first half of the year with small players pulling ahead of larger counterparts in terms of earnings growth, according to UOB Kay Hian. Small city and village banks posted double-digit profit growth of 13.7%. In comparison, profit growth hit 4.8% for the big four banks and 10.4% for joint stock banks (JSBs) as they actively cut costs.
"In 1H19, SOEs, JSBs and the sector cut operating expenses by 162bp, 238bp and 178bp yoy respectively. Large banks still have advantage in cost control. Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB) had much lower cost-to-income ratio (CIR) than the others," Eric Wang Zhen, analyst at UOB Kay Hian, said in a report, adding that Shanghai Pudong Development Bank, China Industrial Bank, China Merchants Bank (CMB) and Ping An Bank (PAB) posted strong CIRs.
As a whole, systemwide loan growth hit 13%, whilst that for SOEs rose 9%. "We think loan growth may not accelerate much in 2H19 as management of SOEs guided that their loans will grow 10% yoy in 2019," added Zhen.
Net interest margins, a common measure of profitability, expanded by 30bp for JSBs as they benefitted from low market interest rate which brought down the cost of interbank liability. Unlike JSBs however, SOEs are grappling with more intense pressure on NIMs because of high deposit costs.
Despite the fiercer funding pressure, SOEs have better control of their asset quality than smaller banks. Their NPL balance grew 4% in the first half of the year and NPL ratio fell 8.3bp, whilst that of JSBs rose 7.9% and bad loan ratios falling only by 4.8bp. The average NPL ratios of SOEs and JSBs in 1H19 were 1.34% and 1.65%, respectively.
"SOEs have sufficient provision for headwinds whilst JSBs seem to need more provisions in the next few quarters," observed Zhen.
In 1H19, SOEs’ provisions grew 16.2% YoY, much faster than their loan growth of 9%. However, provision of JSBs grew 12.3% YoY, slower than their loan growth. As a consequence, loan loss reserves-to-loan ratio (LLR) of SOEs was 3.12%, up 19.5bp yoy. LLR of JSBs was only 3.07%, down 2.3bp yoy. In 1H19, due to a big growth in provision balance, provision coverage ratio of SOEs reached 239%, up 36ppt yoy. Provision coverage ratio of JSBs was only 194%, up 7.9ppt yoy.
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