Bank of China

Impact from the global financial crisis didn't stop China's top three State-controlled banks from posting a profit for 2008.

But they face much tougher challenges in 2009.

Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB) last week reported 36 percent and 34 percent net profit growth for 2008. Despite huge losses from its US subprime mortgage-related investments, Bank of China (BOC) also managed 14 percent net profit growth last year.

But earnings growth in the top three State-controlled banks slowed significantly in the fourth quarter of 2008. ICBC, the biggest, only maintained a 0.5 percent net profit growth, while CCB and BOC saw 30 percent and 59 percent drop in net profits.

Net interest margin became the main factor hurting the banks' profit growth.

In addition to higher provisions the top three banks set aside for their US subprime mortgage-related holdings, analysts pointed out that narrowing net interest margins not only led to the banks' fourth quarter profit growth slowdown last year, but also will cut their profitability in 2009.

Although CCB's net interest margin for the full year increased 6 basis points, its fourth quarter net interest margin declined 13 basis points from the previous quarter, Chen Shuixiang, an analyst from China Jianyin Investment Securities, wrote in a report. A basis point is 0.01 percentage point.

ICBC's net interest margin in the fourth quarter stopped growing in spite of a 15 basis points growth for the full year, while BOC's net interest margin fell 13 basis points in 2008.

China's central bank has cut lending rates by 216 basis points since last September to stimulate the economy while lowering the deposit rate by 189 basis points, hurting loan profitability at banks.

Chen predicted that net interest margin in the top three banks will contract by a further 40 basis points this year.

"It would be lucky if the top three banks maintain a positive profit growth in 2009. Most mainland banks are facing similar scenarios as the impact of the global financial crisis is far from over," Chen said.

Donghai Securities analyst Li Wen even forecast the top three banks' net profit in 2009 to fall more than 10 percent. "The top three banks will only be able to see positive net profit growth after 2010," Li wrote in a report.

Despite being not as pessimistic as other analysts, Guoxin Securities analyst Tan Xuan also projected net profit growth in the top three banks to be lower than 10 percent this year.

Some argue that rapid loan growth since the beginning of 2009 might help boost the top three banks' profits.

Domestic banks extended a total of 2.69 trillion yuan in new loans in the first two months of 2009, up 159 percent from the previous year, according to the central bank's figures.

But analysts also question the asset quality of the top three banks amid a slowing down economy in China.

"Rapid lending growth is not enough to compensate for the contraction in net interest margins and the asset quality in Chinese banks may also deteriorate due to a weakened economy in China," said Zhang Jing, an analyst from Minzu Securities.

Although its non-performing loans (NPL) ratio fell 0.39 percentage points compared to a year earlier, CCB's NPL ratio of 2.21 percent at the end of 2008 was still 0.04 percentage points higher than the figure at the end of third quarter last year.

According to CCB President Zhang Jianguo, about 35 percent of the bank's new loans went to the manufacturing industry and small and medium-sized enterprises, which were hard hit in the global economic downturn.

Weak industrial output data suggest the surge in credit hasn't translated into a strong pickup in real economic activity.

A 3.8 percent rise in industrial production in the first two months of the year fell short of some economists' expectations. Discouraging industrial output, together with a plunge in February exports and a 1.6 percent drop in China's consumer price index in February, indicate that the government's stimulus measures - while boosting loans and capital expenditure investment - have yet to make a strong impact on the fortunes of private companies and households.