Monday, May 11, 2015

Banking on China - in the worst way

[Two news articles - one on China's economy, and one on the banking sector. Both expect China's worst year in decades]

China cuts interest rates for third time in six months as economy sputters

May 10 2015

BEIJING - China cut interest rates for the third time in six months on Sunday in a bid to lower companies' borrowing costs and stoke a sputtering economy that is headed for its worst year in a quarter of a century.

Analysts welcomed the widely-expected move, but predicted policymakers would relax reserve requirements and cut rates again in the coming months to counter the headwinds facing the world's second-largest economy.

The People's Bank of China (PBOC) said on its website it was lowering its benchmark, one-year lending rate by 25 basis points to 5.1 percent from May 11. It cut the benchmark deposit rate by the same amount to 2.25 percent.

"China's economy is still facing relatively big downward pressure," the PBOC said.

"At the same time, the overall level of domestic prices remains low, and real interest rates are still higher than the historical average," it said.

Sunday's rate cut came just days after weaker-than-expected April trade and inflation data, highlighting that China's economy is under persistent pressure from soft demand at home and abroad.
While the PBOC acknowledged the difficulties facing China's economy, it said in its statement accompanying the announcement that it wants to strike a balance between supporting growth and deepening structural reforms.

As part of these reforms, it lifted the ceiling for deposit rates on Sunday to 1.5 times the benchmark level, the biggest increase in the ceiling since it began to liberalize the interest rate system in 2012.


Economists had said it was a matter of when, not if, China eased policy again after economic growth in the first quarter cooled to 7 percent, a level not seen since the depths of the 2008/09 global financial crisis.

Indeed, some analysts have even said recently that the PBOC had fallen behind the curve by not responding aggressively enough to deteriorating conditions.

With China set to publish more key economic data on Wednesday, including industrial output and investment, the timing of the rate cut could add to worries that figures may disappoint across the board again, as they did in March.

For now, however, some were confident that policymakers can arrest the slide.

"Intensified policy loosening will help effectively halt the economic slowdown," said Xu Hongcai, a senior economist at China Centre for International Economic Exchanges, a well-connected think-tank in Beijing.

A cooling property market and slackening growth in manufacturing and investment have weighed on the Chinese economy. Annual growth is widely forecast to sag to 7 percent this year, down from 7.4 percent in 2014.

In an attempt to energize activity, the PBOC has now lowered interest rates and relaxed the reserve requirement ratio (RRR) five times in six months, and many economists believe more policy loosening is in store.

This is partly because despite the steady drum roll of policy easing, there are indications it has not benefited the real economy. Some data suggests banks are not passing on lower interest rates to borrowers, and credit is still not flowing to the sectors in most need of the funds.

"The effectiveness of the rate cut won't be very big," said Li Qilin, an economist at Minsheng Securities. "The PBOC has already cut benchmark interest rate by a total of 65 basis points, but borrowing costs have only fallen marginally."


Banks are also struggling as the economy founders. Lending has slowed, bad loans are piling up, and profits margins are getting squeezed as China liberalizes its interest rate market. Banks' earnings reports last month showed profit growth hit a six-year low in the first quarter.

Given these challenges, the PBOC said it does not expect banks to pay savers the maximum deposit rate allowed by authorities.

And with the prospect that borrowing costs may stay stubbornly elevated, government economists told Reuters earlier this month authorities may ramp up state spending to shore up growth, in the hope that fiscal policy would work where monetary policy hasn't.

But Li Huiyong, an economist at Shenwan Hongyuan Securities, cautioned against thinking that lower borrowing costs would not trickle down to businesses and consumers at some point.

"Don't underestimate the cumulative effect of the cuts in interest rates and RRR," Li said. "This won't be the last cut. "The rate could be lowered to 2 percent at least, and we expect the economy to gradually stabilize in the coming two quarters."



China banks set for worst year since 2004 as bad loans climb
April 30

SHANGHAI — China’s big five banks are at risk of their weakest full-year profit growth since at least 2004 after first-quarter results showed bad loans rising in a struggling economy.

Industrial & Commercial Bank of China (ICBC) reported a 21 billion yuan (S$4.5 billion) jump in soured credit in the first quarter, the biggest increase since at least 2008, in a filing yesterday (April 29).

ICBC, China Construction Bank, Agricultural Bank of China, Bank of China and Bank of Communications all this week reported profit growth of less than 2 per cent, down from an average of about 10 per cent for the same period last year.

“We are off to a weak start and earnings growth may get even worse in the second half,” said Ms Chen Shujin, a Hong Kong-based analyst at DBS Vickers Hong Kong. The start of a deposit insurance system in May will add to banks’ costs, she said.

In Hong Kong, shares of ICBC, the world’s biggest lender, fell 1.8 per cent as of 9.41am local time, compared with a 0.5 per cent decline in the benchmark Hang Seng Index. Bank of China fell by the same amount.

Non-performing loans at ICBC, Construction Bank, Bank of China and Bank of Communications increased by the most in at least seven years in the first quarter.


The nation’s biggest lenders may need to raise more capital this year because of increases in bad loans and tighter regulatory requirements. Mr Francis Chan, a Hong Kong-based analyst at Bloomberg Intelligence, cited the example of Agricultural Bank already boosting Tier 1 capital in the first quarter by 8.9 per cent to 1.1 trillion yuan.

China’s economy is forecast to expand this year at the slowest pace since 1990 and lenders face intensifying competition for funds as the government deregulates the finance industry. The combined profit growth of the top five banks may slow to 4.6 per cent this year, the weakest in at least 12 years, according to consensus analysts’ estimates.

Banking shares have jumped amid a Chinese stock boom, helping ICBC to overtake Wells Fargo & Co as the world’s most valuable lender. At the same time, Chinese banks remain the cheapest in the world, trading at about 7.7 times estimated earnings for this year, the lowest for lenders with a market value of more than US$10 billion (S$13.2 billion), data compiled by Bloomberg show.


A property slump and government efforts to rein in shadow banking are making it harder for Premier Li Keqiang to sustain the pace of economic growth. China has relaxed home-purchase controls and pumped at least 1.5 trillion yuan of liquidity to lenders through reserve-ratio cuts as the government seeks to limit the slowdown.

“The trend remains that banks’ profit growth will continue to slow while asset quality will continue to worsen,” said Mr Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities HK. “A possible bright spot for the banking industry” will be efforts to increase private ownership of lenders, Mr Cao said.

ICBC and Agricultural Bank both set aside about 50 per cent more provisions against potential bad loans in the quarter than a year earlier, while Construction Bank boosted those charges by 81 per cent. At Bank of China, provisions fell by 9 per cent while Bank of Communications reported little change.

While bad loans are climbing, they still account for less than 2 per cent of banks’ total advances, compared with almost 20 per cent in 2004.

Standard & Poor’s warned on April 15 that this year could be a tougher year for banks as more loans to mid-sized and large manufacturers go bad. In a sign of stresses, Baoding Tianwei Group was the first state-owned company in China to default on an onshore bond, failing to pay 85.5 million yuan of interest.


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