China’s big banks reported hefty profits in the first half of this year, but signs of strain are showing from their massive lending binges and as they struggle to meet tougher capital requirements.
Profits of the nation’s five biggest banks by assets, led by Industrial & Commercial Bank of China Ltd., were buoyed in part by a greater focus on business that generates fee income, such as credit cards and wealth-management products.
Chinese banks are increasingly looking to pump up their capital base, mostly by selling debt, in the face of a push to raise regulatory requirements. At the same time, they face increased concerns about potentially problematic loans tied to real estate and government projects. Some Chinese lenders recently acknowledged a bigger exposure to local-government debt used for infrastructure projects than they previously disclosed.
Some banks also have significantly beefed up their provisions against loan losses. Bank of China Ltd., for example, has set aside more money for bad loans after just six months than it did for all of 2010. Such moves eat into capital. ICBC, which reported results on Thursday, also set aside more funds for loan losses.
Investors are particularly concerned about bank loans to local governments to build highways and other infrastructure projects, estimated to be as much as 14.38 trillion yuan ($2.25 trillion), or a third of all outstanding loans in the country as of the end of last year. Big state-owned banks gave many of those loans and often accepted land as collateral.
However, many analysts don’t expect China to suffer a banking crisis as was seen in the U.S. and Europe, largely thanks to its still-robust─albeit slowing─economic growth. Zhu Chaoping, head of research at ChinaScope Financial, estimates that China’s economic growth will weaken from 10.3% last year to 9.4% this year and 9% in 2011. ‘This growth rate will provide support to the banking industry,’ he said.
To cope with the two-pronged capital squeeze, China’s publicly traded banks already have raised 594.7 billion yuan ($93 billion) from the sale of stocks and bonds since July 1, 2010, according to ChinaScope, a market-research firm in Hong Kong. More fund-raising plans are in the offing.