After three quarters of compressed margins and rising bad loans that threatened bottom lines, China's five largest banks had some respite in the final three months of 2016 that could lead to small earnings growth for the year, analysts said.
The slight improvement in the fourth quarter was supported slower increase in bad loans, which helped to stabilize the quality of credit assets in Asia's largest economy, analysts said.
The latest statistics by the China Banking Regulatory Commission released last month showed non-performing loan (NPL) ratio of commercial banks decreasing 0.02 percentage point to 1.74 percent by the end of 2016. Large NPL formation was a major pain point for Chinese lenders, who saw profit growth stalling.
"We expect the mega Chinese banks to report small earnings growth for 2016 on the back of significantly reduced pressures on their net interest margins and loan quality in the fourth quarter," Qiang Liao, senior director of financial institutions ratings at S&P Global Ratings, told CNBC.
China's five largest banks are scheduled to report their fourth quarter and full year earnings next week, starting with Agricultural Bank of China and Bank of Communications on Tuesday. China Construction Bank is set to do so on Wednesday, while Industrial and Commercial Bank of China (ICBC) and Bank of China would follow on Thursday and Friday, respectively.
The Chinese lenders are among the largest in the world by assets, occupying the top four spots in a ranking by S&P Global Market Intelligence. ICBC tops the chart with $3.42 trillion worth of assets as of Dec. 31, 2015, the ranking showed.
The ride ahead continues to be a bumpy one for the lenders, with Fitch Ratings warning that net interest margin (NIM) – a measure of lending profitability – would remain under pressure through 2017. The slight improvement in NPL ratio, Fitch analysts said, does not reflect better underlying credit conditions.
They added that asset quality appeared to have improved after banks are allowed to swap struggling commercial clients' debt obligations for equity in those companies. That process, called debt-for-equity swap, was introduced in an attempt to ease China's growing debt as economic growth slows.
"Some of these transactions might not be commercially driven, might not involve a true transfer of risk or may simply shift that risk to other parts of the financial system, without any write-down," the analysts wrote in a March 5 note.
Analysts at Huatai Research are more optimistic about the banks' prospects this year. Shujin Chen and Alfred He co-wrote in a Tuesday note that the increase in NPL has peaked and net interest income growth looks set to recover.
Better regulations will also help the banking sector to manage risks, though tighter monetary policy could hinder demand for loans.
"We expect them to achieve 5-10 percent steady annual earnings growth during 2017-2019, driven by steady gross credit growth, stable NIM and strong fee income," they said.
Huatai's forecast for 2017-2019 is higher than Bloomberg consensus of 4-7 percent.