The cumulated net income of the top five Chinese banks expected to rise by 8 per cent in 2018

March 21, 2018 – Bloomberg

Profits at China’s top banks are set to surge after two dismal years, boosted by a strengthening economy and disproportionate benefits from the government’s campaign to cut debt.

Industrial & Commercial Bank of China Ltd. and its four biggest peers will report next week a combined net income of 952 billion yuan ($150 billion) for 2017, an increase of 2.9 percent on year and the fastest expansion since 2014, according to consensus analyst estimates compiled by Bloomberg. That’s forecast to pick up to 8.1 percent in 2018 as rising global interest rates boost margins.

“China’s banks have shaken off the doldrums,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co. “Their earnings growth will accelerate for the next two to three years.”

The numbers are partly flattered by a poor 2015 and 2016, when concerns intensified about rising bad loans across China’s financial sector. However, shares of big banks have since rebounded as economic growth accelerated in 2017 for the first time in seven years, auguring higher demand for loans. Another sign of optimism emerged this month, when the regulator is said to have lowered bad-loan provisions to a minimum 120 percent from the previous 150 percent, which frees up more cash for lending.

Investors are also betting that the Big 5 — which control more than a third of China’s $40 trillion in banking assets — will cope better than their smaller rivals amid President Xi Jinping’s crackdown on excessive debt. The deleveraging drive is forcing smaller banks to increasingly turn to ICBC and its peers to borrow money, raising interbank rates and driving up margins typically after a lag of a few months.

“We are upbeat on rerating at banks,” analysts at China International Capital Corp., led by Victor Wang, wrote in a note. “Earnings should improve as economic growth stabilizes.”

Agricultural Bank of China Ltd. will kick off earnings of the major banks on Monday. It has already said profit may have grown 5 percent last year, exceeding the 2.7 percent Bloomberg consensus. Analysts at Goldman Sachs Group Inc. predict more positive surprises at listed banks, with net income growth doubling to 8 percent in the final quarter from the average expansion reported for the first nine months.