Profits of China's Big Five banks hold up despite lending rate squeeze

China's Big Five banks have posted stable to stronger profit growth for the third quarter, thus far defying top bankers' expectations of a difficult second half after a government push to cut lending rates. The country's central bank unveiled a key interest rate reform in August to help steer borrowing costs lower for companies and support a slowing economy that has been hurt by a trade war with the United States.

But the overhaul of the loan prime rate (LPR), which banks must reference when setting interest rates on new loans, threatens lenders' margins and may weigh in the fourth quarter. The Bank of China Ltd (BoC) posted a 3.04% year-on-year rise in net profit for the third quarter on Wednesday, while China Construction Bank Corp (CCB) recorded an estimate-beating 6.07% increase.

The results are in line with those of Industrial and Commercial Bank of China (ICBC),, the world's biggest-listed lender by assets, Agricultural Bank of China (AgBank) and Bank of Communications Co (BoCom), which all posted estimate beating Q3 profit growth on Friday. The stability is down to the "government's accommodative policies, the stable repayment capacity of state-owned borrowers and banks' disposal of NPLs," said Yulia Wan, a senior analyst at Moody's Investors Service.

But Wan warned of increasing difficulties for the sector in the next 12-18 months as trade tensions with the US continue. China's economic growth slowed more than expected in the third quarter to its weakest pace in almost three decades as the bruising trade war hit factory production, boosting the case for Beijing to roll out fresh support.

It has relied on a combination of fiscal stimulus and monetary easing to weather the slowdown, including trillions of yuan in tax cuts and local government bonds to fund infrastructure projects, as well as the efforts to spur bank lending. All five lenders said their non-performing loan (NPL) ratios were steady or had fallen - ICBC's edged down to 1.44% at the end of September from 1.48% at the end of June, while the other four lenders posted steady ratios.

However, the NPL ratio of China's banking sector as a whole is at its highest level since the global financial crisis. Net interest margins (NIM), a key gauge of profitability, narrowed for BoCom and ICBC, rose slightly for BoC and stayed the same at CCB, suggesting there was no industry-wide hit from lower lending rates. AgBank did not publish their Q3 NIM.

The NIM of big banks may continue to fall in Q4, on a combination of lower asset yield, partly due to a further reduction in risk profile, and higher deposit cost, said Richard Xu, equity analyst with Morgan Stanley.