Fat Profits Over but Sunny Days Still for China Banks

Photo: Frederic J. Brown | AFP | Getty Images

This week two of China's biggest banks - Bank of China (BOC) and the Agricultural Bank of China (AgBank) - reported their worst annual earnings growth since going public, but analysts tell CNBC the sector is far from seeing the end of its heydays.

Mike Werner, senior equity analyst at Sanford C. Bernstein said while days of 20 percent and 30 percent earnings growth are over, the banks' results are still "very solid."

"I think now you are looking at high single digits or low teens in terms of earnings growth going forward," Werner said. "We are probably going to see faster earnings growth from some of the smaller banks."

Jim Antos, bank analyst at Mizuho Securities Asia backed that sentiment saying he still expects double digit earnings growth from the sector this year, because there's no chance of a credit crisis in China in 2013.

"We're still going to see some net interest margin compression through the first half for most banks and it's probably going to level off, but that does not mean that these banks are not going to be profitable," said Antos.

(Read more: Why It's Time to Buy China Bank Stocks)

End of Bumper Profits For China Banks: Analyst

Facing pressure on net interest margins after two rounds of interest rate cuts in 2012, AgBank's net profit rose 19 percent to $23.36 billion last year, compared to growth of 28.5 percent in 2011. BOC's net profit grew 12.2 percent to $22.4 billion after rising 19 percent in the year before. China Construction Bank (CCB), meanwhile, saw net profit rise 14 percent, better than expected.

Earnings from the Industrial and Commercial Bank of China (ICBC), the world's biggest bank by market value, is expected on Wednesday.

While the results so far still show double digit growth, the banks themselves admit that growth is slowing, hit by the cooling of China's economy, which has impacted margins.

(Read more: China Big 5 Banks' 2012 Profit Seen Up 12%)

But Timothy Wong, managing director and regional head of DBS Group Research points out that recent macroeconomic data have shown that China's economy is improving and this should bode well for the banks. He says the banks' share price already reflect the latest earnings. So far this year, Hong Kong listed shares of ICBC and AgBank are down about 1 percent, while CCB has gained nearly 3 percent and BOC is up 4 percent.

"I think what's priced in is that the worst is probably over. We do see pressure on the net interest margin side, on margins, but I think the sense is that non-performing loans are not going to get a lot worse in 2013," Wong said.

Fears that non-performing loans at the country's banks will spike amid the slowdown have led several analysts to question the reliability of the earnings announced by banks.

Both BOC and AgBank have reported that their non-performing loan ratios remained largely unchanged at 0.95 percent and 1.33 percent respectively at the end of 2012.

But Donald Straszheim, senior managing director, International Strategy & Investment said "It's hard to believe those 1 percent non-performing loan rates that they [the banks] put out."

However, he does add that China's still got "pretty good" economic growth, which could minimize the impact of the bad loans.

"On the other hand, they still got pretty good nominal income growth, and a lot of those loans are getting smaller and smaller, " Straszheim said.

-By's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu