Profits for bigger banks expect to trump those of smaller lenders in H2

China’s largest banks achieved higher profits and performed better overall than smaller lenders in the first half of the year, and experts say this trend will continue.

The four biggest state-owned banks enjoyed an overall net profit of 503.6 billion yuan (US$ 76.8billion) due to their better asset quality. Their  non-performing loan ratio also fell by the end of last year, with the Agriculture Bank of China recording the biggest drop of 19 basis points.

Their average NPL ratio declined to 1.66 percent, below the whole sector’s level of 1.74 percent, according to data released last month by the China Banking Regulatory Commission, the country's banking regulator.

The big four banks also benefited from improved net interest margins than their smaller counterparts. NIM — a key metric of banks' profitability — measures the difference between interest paid and interest received, adjusted relative to the amount of interest-generating assets.

Bank of China enjoyed a 8 basis point quarterly growth in NIM as of the end of June, with the remaining three state-owned banks all posting a 4 basis point growth over the first quarter.

Most of the eight joint stock commercial banks posted a lackluster performance compared with their state-owned rivals in the first half, affected by the de-leveraging campaign.

China Merchants Bank's net profit grew by double digits to 39.2 billion, while Huaxia Bank posted just 0.1 percent year-on-year growth.

The average NPL ratio for the mid-sized lenders stood at 1.72 percent, with Shanghai Pudong Development Bank having the highest at 2.09 percent.

Overall, the joint-stock banks saw their NIM fall by 2 basis points quarter on quarter. Huaxia Bank saw the sharpest quarter-on-quarter drop of NIM by 20 basis points, followed by Pingan Bank's 15 basis points, while the NIM for China Minsheng Bank and Industrial Bank was flat at 1.4 percent in the first quarter. Only SPDB and CMB saw a quarterly rise of their NIM by 10 and 1 basis points respectively.

Quite unlike their previous performance, some joint-equity players recorded a lower NIM than the biggest lenders by the end of June, said Sophie Jiang, Nomura's head of China and Hong Kong Banks Research.

The growth rate of assets and net profit of the mid-sized commercial lenders was slower than that of the big four banks in the first half.

The divergence has surfaced in the banking sector in the first half, with a clear disparity seen in the banks’ growth quality and NIM. This trend might continue if the regulators take further action in the second half, Jiang noted.

Financial deleveraging may weigh on banks’ short-term profitability, but the stability of the financial system will be strengthenedin the long run, Jiang said.