Chinese banks may report lower half-year earnings this year due to increased provisions for bad loans and narrowing spreads, analysts said.

Huaxia Bank, the first of China's major listed lenders to announce interim results on Saturday, posted a 13.6-percent fall in net profit and a 11.3-percent decline in operating revenue, which could be a microcosm of the financial performance of 14 listed Chinese banks in the first half.

The first-half earnings of banks are likely to drop some 3 to 7 percent from a year earlier despite whopping credit growth, according to analysts.

"Brisk credit growth could somewhat offset the pressure that shrinking interest margins imposed on banks' profitability, but regulator's call for higher provision for bad loans could become the key factor deteriorating banks' immediate profits in the first half," Fu Lichun, banking analyst with Southwest Securities, told China Daily.

Chinese banks have advanced a total of 7.37 trillion yuan in new loans in the first six months in an effort to support the nation's stimulus policy for economic recovery, which has sparked concerns that such a credit surge may lead to a spurt in bad loans.

Liu Mingkang, chairman of China Banking Regulatory Commission (CBRC), the nation's top banking watchdog, had asked commercial lenders in mid July to adhere to the bottom line for bad loan provisions and raise provision coverage ratio to over 150 percent within the year.

China's commercial banks had a combined provision coverage ratio of 134.3 percent as of June, up 17.9 percentage points from the beginning of the year, according to the CBRC.

Four of the 14 listed commercial lenders, namely, Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Shenzhen Development Bank, were yet to meet the regulatory requirement of 150 percent loss-loan coverage ratio by the end of the first quarter.

This may affect these banks' profitability in the first half as the funds set aside as bad loan provisions may increase significantly in the second quarter, analysts said.

"Joint-stock lenders, such as Shanghai Pudong Development Bank and Minsheng Bank, with sufficient provisions for bad loans, could expect better profits in the first half," Fu said.

Despite the dismal expectation on banks' mid-year results, analysts remained upbeat about banks performance for the year as a whole.

Wu Yonggang, senior banking analyst at Guotai Junan Securities, predicted that banks' net profit growth might decline by an average of 7.4 percent in the first half, but they are likely to see about 8.3 percent profit growth for the whole year.

"A decent full-year growth in earnings could be expected, as interest spreads may have bottomed out in the second quarter and interest income as a result of the credit surge could ensure banks book higher profits," Fu said.

The nation's joint-stock banks are expected to release their first half results in the coming two weeks, followed by the top three State banks, at the end of August.

(China Daily August 11, 2009)