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Highly-profitable Chinese banks face challenges


08:15, November 06, 2012

BEIJING, Nov. 5 (Xinhua) -- China's commercial banks have been very profitable, despite a slowed economy in the first three quarters of 2012. However, their heavy reliance on net interest income may prove challenging in a time of gradual interest liberalization.

The five largest banks - Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communications - saw combined profits of 614.75 billion yuan in the first three quarters. All of the banks saw their profits rise by 10 to 20 percent during the period.

Eight joint stock banks, all mid-sized lenders, lagged far behind their bigger rivals in absolute numbers, but outperformed them in terms of growth.

The eight banks posted combined profits of 181.7 billion yuan, registering a 29-percent jump year on year.

The difference in profit growth was consistent with findings by KPMG - one of the "Big Four" international professional firms - at the end of September.

"There was substantial variance in profit growth rates between different banks in China: the big five commercial banks and joint stock banks," KPMG said in a report sent to Xinhua.

However, the overall growth rate for Chinese banks has apparently been slower. An unflattering macroeconomic environment has been blamed, with China's economic growth for the first three quarters consistently edging lower.

The third quarter saw the gross domestic product expanding at an annual rate of 7.4 percent, the lowest in 14 quarters.

"The fact that the banks' overall profit growth has narrowed is in line with market expectations, given the slowing economy," said Professor Zhao Xijun, a finance professor at Renmin University.

Loan quality may also suffer as a result of the slowing economy, Prof. Zhao said.

Nine out of sixteen listed banks are now witnessing greater non-performing loans (NPLs), both in value and in proportion.

The most cited case has been Ping'An Bank, a Shenzhen-based lender controlled by Ping'An Insurance. Its NPLs have increased by 2.36 billion yuan, rising 71.69 percent, since the beginning of this year .

"There is increasing evidence of risks passing through the real economy to the virtual economy, although they have largely remained mild," Prof. Zhao said.

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