Chinese banks bid farewell to era of easy profits

China’s Big Four banks face far weaker earnings growth in the future as profits continue to fall this year.

State-owned Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China Ltd and Bank of China will report on their earnings picture later this week and into the next.

Analysts, however, note that the expected rise in significant profits for the first-half of this year could be the last as dwindling deposits and a more competitive interest rate market herald smaller earnings growth in the future.

"We remain cautious on the Chinese banks, although solid first-half results might be supporting of the share price in the short term,” said Tracy Yu, Deutsche Bank analyst.

Analysts expect ICBC, the world's biggest bank by market capitalization, to post a 15% rise in net profit from a year earlier. This will, however, be almost half the growth it reported for the first half of 2011.

ICBC’s slowdown sped up in the second-quarter when net profit growth dropped to 9.5% or RMB61 billion.

Analysts estimate that CCB will report a second-quarter net profit growth of 11% while AgBank is expected to see growth at 19%. Bank of China could post a 4% increase in quarterly profit.

The formerly high profit growth reported by the Big Four, which exceeded 30% last year, came from government-set fixed net interest margins and a steady economic growth rate of at least 10%. This is no longer the case.

Deposit growth has fallen sharply. Banks have suffered net monthly declines in yuan deposits five times since 2011 compared with just once between 2002 and 2010.

This year, the People’s Bank of China increased inter-bank competition by giving banks more leeway to set their own deposit and lending rates.

"Margins will likely fall more in the second half of this year, partly because of the interest rate liberalisation we're seeing," said Tan Yuansheng, president of Chongqing Rural Commercial Bank.

China’s economic growth in the first quarter dropped to 7.5%, its worst showing since 1999. The slowdown is fanning persistent fears of a rise in bad loans that are currently running at less than 1%. Bad loans are now likely to rise to about 3% to 5%.