PREVIEW-Chinese banks face rocky H2 as profit growth slows

* WHAT: Chinese banks Q2 earnings in August

* WHEN: Aug. 18 BoCom, Aug. 20 CCB, Aug. 26 ICBC & BOC

* Higher loans, NIM and lower costs benefit bottom line

* Concerns over govt loans and off-balance sheet lending

By Michael Wei and Doug Young

BEIJING/HONG KONG, Aug 16 (BestGrowthStock) – China’s major banks
could report rising problem loans when they release quarterly
earnings, which are expected to show slowing profit growth as
Beijing tightened monetary policy to cool a racing economy.

April-June quarterly net profits for most Chinese lenders
are set to slow somewhat from the first-quarter’s break-neck
pace, but should still come in at healthy rates of around 15
percent, and as high as 30 percent in some cases, according to
seven analysts surveyed by Reuters.

Bank of Communications (3328.HK: ), the No. 5 lender, will
kick off results when it reports on Wednesday, followed by No.
2 China Construction Bank (0939.HK: ) on Friday.

More worrisome than the slower growth is a collection of
uncertainties, ranging from rising bad loans following a
government-backed 2009 lending binge, to a slowing recovery in
interest margins and tightening regulatory environment,
analysts said.

“While we are bullish about earnings prospects for the
first half of 2010, this is the calm before the earnings storm
that we see brewing in the fourth quarter of 2010,” James
Antos, an analyst with Mizuho Securities Asia said.

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Infrastructure loans to local governments are seen as a big
risk. Stephen Green, China economist at Standard Chartered
Bank, estimated in June that Chinese banks may have as much as
7 trillion ($1 trillion) yuan in loans to local government
infrastructure projects on their books, with 30-50 percent of
that likely to go sour.

The banks may have to book provisions for these sour loans
as early as end-2010, analysts said.

TRUST LOANS

There have been others steps by China’s banking watchdog
aimed at the sector’s potential risks.

The China Banking Regulatory Commission has ordered banks
to bring loans to trust companies back onto their balance
sheets within two years, just days after ordering banks to
assess how they would fare in a worst-case scenario under which
housing prices would fall by as much as 50 percent.

Net interest margins, a key source of profit for banks in
China, are set to plateau, ending a recent recovery, as the
probability of a central bank interest rate hike diminishes at
a time when China’s broad economy shows signs of moderate
slowdown.

“We expect potential provisioning headwinds and stalling
margin recovery in the second half to keep the sector in a
rangebound trading environment in the coming months,” said
Sarah Wu, an analyst with UBS Securities.

Capital raising, once a key overhang among Chinese lenders,
has largely disappeared after CITIC Bank (0998.HK: ) (601998.SS: ),
the last among the major players, announced a $3.84 billion
rights issue plan earlier this month, analysts said.

Antos of Mizuho forecast the bad-loan coverage ratio, which
stands at 150 percent now, may be raised by the regulator to
180 percent by the end of the year, which would further hit
banks’ bottom lines.

“This possibility does not bode well for the earnings
prospects of the fourth quarter of 2010,” he said.
(Editing by Ken Wills and Muralikumar Anantharaman)

PREVIEW-Chinese banks face rocky H2 as profit growth slows