BEIJING—Chinese bank executives signaled concern that bad loans could rise, as earnings continued to slow in the face of declining economic growth.
China's biggest bank by assets, Industrial & Commercial Bank of China Ltd. said Thursday its first-half net profit rose 12.4% from a year earlier to 138.35 billion yuan ($22.62 billion). Bank President Yi Huiman said the bank would remain cautious against a potential pickup in bad loans after its non-performing loan ratio increased marginally over the first half of the year.
Bank of China Ltd. said that its net profit for the first six months was 80.72 billion yuan, up 12.7% from a year earlier.
China's banks massively expanded their lending in recent years, an effort that sustained the economy's rapid economic growth and kept bank profits expanding by more than 20% annually. However, industries ranging from solar component makers to shipbuilders and car manufacturers used the readily available credit to expand their operations, resulting in overcapacity.
Furthermore, a more sluggish economy has resulted in slower growth of tax revenue, complicating local governments' efforts to repay the debts they have rung up to fund infrastructure construction.
"Though our nonperforming loan ratio has been held below 1%, we still face big pressure from rising bad loans," China Construction Bank Corp. Chairman Wang Hongzhang said earlier this week.
Agricultural Bank of China Ltd. President Zhang Yun warned Wednesday that asset quality of China's banks would come under pressure as the government pushed forward with interest rate liberalization.
Chinese banks' nonperforming loan levels are still extremely low. According to data from the banking regulator, bad loans in China's banking sector accounted for only 0.96% of all lending at the end of June, largely unchanged from 0.95% at the end of last year.
Still, analysts say bad debts might be greater than reported, with banks issuing fresh credit to cover maturing loans that borrowers would otherwise struggle to repay.
Standard & Poor's Ratings Services said in a report Thursday that banks may be understating the true extent of their nonperforming loans by disguising "their sizable corporate credit exposure as investments in wealth management products," which are a type of off-balance-sheet investment fund.
The credit-rating firm said that it expects that the amount of bad loans the banks hold could substantially increase in coming years.
Those banks that disclosed the geographical distribution of their bad loans said they were particularly concentrated in the Yangtze Delta, an area including the city of Shanghai as well as Jiangsu and Zhejiang, two provinces known for their entrepreneurial, private companies, unlike many other provinces where state-owned firms dominate the local economy.
China Construction Bank said that 2.33% of loans it had made the region had gone bad at the end of June, up from 1.97% six months earlier.
Both Bank of China President Li Lihui and Mr. Yi, the ICBC president, said that their banks' nonperforming loans were concentrated in the Yangtze River Delta provinces.
In a report issued in July, the China Banking Association, a government-backed industry group, said that in the Yangtze region in particular steel traders had been using their inventories as collateral to borrow from banks, only to use the funds to make loans to other borrowers at higher interest rates.
"The Yangtze Delta–an area where informal lending is more developed–is where nonperforming loans are rising the most, becoming a bad loan disaster area," the report said.
ICBC said that its nonperforming loans increased by 7.19 billion yuan. However, as a proportion of total lending bad loans stood at only 0.87%, up from 0.85% at the end of last year.
"The rebound of NPLs was attributed to the rising pressure of macro-economic downturn…[causing] bigger operation difficulties to some enterprises, particularly small and medium enterprises," the bank said in its earnings report.
ICBC on Thursday also said it injected liquidity into China's financial system during a June credit crunch. ICBC Chairman Jiang Jianqing said that his bank lent more than 1 trillion yuan in the interbank market, in which banks lend to each other to meet daily needs.
On Wednesday, Agricultural Bank of China said it had injected a net 840 billion yuan during the squeeze. Neither bank said whether they had been asked by the central bank to ramp up their lending when the interest rates banks charge each other for short-term borrowing spiked in mid-June.
—Grace Zhu and Fiona Law contributed to this article. Write to Dinny McMahon at dinny.mcmahon@wsj.com
