Improving asset quality and rising loan demand could see some of China's biggest listed banks bolster their profit growth this year, bankers signaled this week, even as interest margins remain under pressure and more bad loans are written off.
"The trend is promising," Yi Huiman, Chairman of Industrial and Commercial Bank of China Ltd (ICBC), the world's biggest lender, said on Thursday, citing the impact of broad economic recovery.
Pricing for loans is stabilizing and may even pick up as the cost of funds rises this year, Yi said.
Net profit at four of China's top five banks grew by less than two percent for last year, and at Bank of China (BoC) , it fell 3.67 percent - its worst performance in more than a decade.
The banks' results showed deteriorating credit quality and high corporate debt leverage continued to be a primary challenge for the industry, as the world's second-largest economy grew at its slowest pace in a quarter of a century.
Difficulties were most evident at BoC where Pan Yuehan, chief risk officer, said on Friday that asset quality "still faced a great challenge" this year.
Bad loans written off and transferred out by the top five banks rose by 16 percent last year to 309.6 billion yuan ($44.95 billion).
Those banks also include China Construction Bank Corp (CCB), Agricultural Bank of China Ltd (AgBank) and Bank of Communications Co Ltd (BoCom) (601328.SS).
At the same time, profitability in traditional lending fell as net interest margins (NIMs) - the difference between interest earned from borrowers and paid to depositors - narrowed.
At CCB, NIM shrank 43 basis points to 2.20 percent in 2016. At BoC and BoCom, those margins dipped below 1.9 percent.
Bank executives and analysts attribute the margin compression to six central bank benchmark interest rate cuts in 2014-15 alongside changes in taxation and government policy, such as eliminating a ceiling on deposit interest rates.
However, NIMs are stabilizing, and earnings for some of the five lenders are widely expected to improve.
Wei Hou, senior equity analyst for China banks at researcher Sanford C. Bernstein, said some banks may see profit increase by 5 percent or more this year.
"Bank management has been very cautious, tightening loan underwriting standards and preventing future credit costs," Hou said.
Prices of the banks' Hong Kong-listed shares have risen 6 to 13 percent so far this year as investors bet on recovery.
Smaller banks will still face pressure, said Dexter Hsu of Macquarie Capital Securities in Taiwan. Tighter liquidity is likely to drive up funding costs in the interbank market, lowering earnings on wealth management products, he noted.
Beijing's plan to boost investment in infrastructure is creating more long-term loan demand from state-backed borrowers.
Such spending is "very important" to stabilize economic growth, CCB President Wang Zuji said on Thursday. Moreover, as the government is also trying to stimulate consumption, CCB will lend more to small companies and retail borrowers.
"This year, corporate loan demand is stronger than last year, especially in urban infrastructure construction and transportation," noted ICBC President Gu Shu.
Earlier this month, China's Premier Li Keqiang told banks "to focus on their main business" and "strengthen their ability to serve the real economy."
Banks are trying various means of reducing non-performing loans. As well as big write-offs, the banks are swapping questionable debt into equity, saving the amount of money they would have to set aside should such debt turn bad.
Debt-to-equity deals are part of a wider government campaign to restructure mainly state-owned enterprise debt.
By the end of last year, 12,836 creditor committees had been set up nationwide, examining borrowing of 14.85 trillion yuan, representing 17 percent of all commercial bank loans, banking regulator statistics show.
Since October, banks have signed about 500 billion yuan in debt-to-equity swaps in mostly state-owned coal and steel enterprises, according to analysts who expect the amount to double this year.
CCB's Wang said he expected swaps to reach 300 billion yuan by the end of March.
AgBank President Zhao Huan on Wednesday said his bank had swap deals with eight firms with 70 billion yuan in total agreements, and was negotiating with over 20 more.
"Leading indicators, including the gap between non-performing loans and overdue loans and the overdue loan ratio, generally are showing positive changes," said ICBC's Yi.