SHANGHAI Two of China's 'Big Five' lenders, Bank of Communications (BoCom) and Agricultural Bank of China (AgBank), reported modest annual profit growth on Tuesday, as they battled operating pressures and the narrowest net interest margins since at least 2011.
China's central bank cut benchmark interest rates six times in 2014-15 in a bid to revive a slowing economy, but that dragged down margins - a key gauge of profitability for lenders.
Analysts see this trend extending into 2017, adding to the challenges in a sector already grappling with a pile-up in bad debts to the highest level in a decade.
The pressure on assets will be strong this year and there will be a rise in sour debts, Peng Chun, president of BoCom, China's fifth-largest listed commercial bank by assets, said at an earnings briefing in Hong Kong.
BoCom and AgBank, posted a 1 percent and 1.9 percent rise in 2016 profits, respectively, helped by loan growth and declining tax burdens, to just beat fourth-quarter consensus estimates.
For the full year, BoCom earned 67.21 billion yuan, up from 66.53 billion yuan in 2015, while AgBank's annual net profit grew to 183.94 billion yuan from 180.58 billion yuan.
At AgBank, growth was supported by a 10 percent rise in net fee and commission income to 90.9 billion yuan, and a 15 percent drop in its tax expenses.
Net interest margins - the difference between interest paid and earned - eased to 1.88 percent at BoCom and 2.25 percent at AgBank at the end of 2016, their lowest since at least end-2011.
Both BoCom and AgBank, China's No.3 listed commercial bank by assets, saw a small reprieve in non-performing loan (NPL) growth last year, highlighting their efforts to clean up bad debt from their balance sheets.
The lenders' NPL ratios showed a slight improvement, with BoCom's easing to 1.52 percent by end-December from 1.53 percent at end-September, and AgBank's at 2.37 percent versus 2.39 percent.
"Asset quality is still the biggest problem for management. We couldn't possibly place it as the second more serious concern," said Peng.
Loan growth at both banks was driven in part by mortgage loans, despite Beijing's continued clampdown on an overheated property market.
At BoCom, mortgage loans grew 27.45 percent year-on-year to 770 billion yuan in 2016, while at AgBank they jumped by almost a third to 2.56 trillion yuan.
"Tightening regulation, fiercer competition, inadequate credit demand and continuing risk exposures," will continue to weigh on the banking industry, AgBank Chairman Zhou Mubing said in his earnings statement.
($1 = 6.8850 Chinese yuan renminbi)
(Reporting by Engen Tham in Shanghai and Matthew Miller in Beijing; Additional reporting by Shu Zhang in Beijing and Julie Zhu in Hong Kong; Editing by Himani Sarkar and Ian Geoghegan)