AgBank Results: First Look at Banking Winter 中国农业银行财报：银行业的冬天

By newsdoug on March 23, 2012

We’re getting a first look at what could be a long-predicted chill set to take hold in China’s bloated banking sector, with Agricultural Bank of China’s (HKEx: 1288; Shanghai: 601288) annual results showing its quarterly profit fell for the first time since it went public on slower lending and a massive provision against future bad loans. Now the big question that remains is: How long will the winter last, and how cold will it get? AgBank gave the markets a preview of what’s ahead as it became the first of China’s big four lenders to announce its annual results (earnings calendar), which revealed a 14 percent drop in its fourth-quarter profit. (English article) China Construction Bank (HKEx: 939; Shanghai: 601939), the nation’s second largest lender, is set to report later today, while ICBC (HKEx: 1398; Shanghai: 601398) and Bank of China (HKEx: 3988; Shanghai: 601988) will report next week. AgBank is considered the weakest of China’s top 4 lenders, so it’s important not to take its results as too reflective of the broader industry. Still, the numbers look less than exciting, providing a hint of things to come. (results announcement) Perhaps the most telling figure — and also a bit alarming — is the 22.8 billion yuan in provisions the bank took in 2011 against future bad loans, more than double the amount from the previous year. The increase should come as a surprise to no one, as many are predicting a jump in non-performing loans after China’s banks embarked on a lending binge in 2009 and 2010 as part of Beijing’s economic stimulus program at the height of the global financial crisis. Many of the loans made during that period were of questionable quality, especially ones for infrastructure projects to local governments that may now be in danger of defaulting. Beijing has taken a number of moves to ease the situation, including allowing banks to restructure some of those loans to delay repayment (previous post) and also letting banks raise billions of dollars in fresh new capital just 2 years after a previous money-raising wave that saw them collectively tap financial markets for more than $100 billion. Bank of Communications (HKEx: 3328; Shanghai: 601328) became the latest lender to raise fresh capital earlier this month, collecting $8.9 billion through a private placement to mostly government entities. (previous post) AgBank itself said it has no plans to raise fresh capital, thanks in part to 50 billion yuan, or nearly $8 billion, in debt that it issued last year. Issuers of such debt seldom say who the buyers are, but I suspect the Chinese government and government-backed institutional investors were also some of the major purchasers, as Beijing has shown an increasing willingness to rescue the banks since much of their troubles are the direct result of its lending directive during the financial crisis. China bank stocks have rallied at the start of the year following a dismal 2011, but look for that rally to quickly lose momentum in the months ahead when more similar financial results start to come out.

Bottom line: AgBank’s results, including a rare drop in quarterly profit, are setting the stage for a long-awaited banking downturn, which will kill a nascent rally in China banking stocks.

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