A global credit squeeze, shrinking consumer demand and tumbling asset prices are likely to hit 2008 Chinese bank earnings hard, analysts said.

They have also based their estimate in part on a key provisioning requirement that the China Banking Regulatory Commission ordered last month.

On Jan 16, the banking sector watchdog had ruled that all domestic lenders must set aside at least 130 percent of the aggregate amount of shaky loans on their books for provisioning.

Shenzhen Development Bank was one of the earliest to comply with the rule by writing off 9.4 billion yuan of non-performing loans and making a fresh provision of 5.6 billion yuan. This resulted in a 77 percent slump in its 2008 net income.

Analysts said at least six other Chinese banks would have to increase provisioning for bad loans to meet the regulator's requirement. These include the Shanghai-listed China Minsheng Bank and Huaxia Bank.

Another key worrying factor for banks is the decline in China's industrial sector.

Before the economic gloom set in during the latter half of 2008, Chinese lenders had enjoyed brisk growth.

In fact, in the first three quarters of 2008, the 14 listed domestic banks posted a 50.36 percent growth in net profit from the year ago period.

Since then, however, the economic environment has deteriorated rapidly, raising the risk of loan defaults by corporate borrowers, especially those whose fortunes have been tied to the export sector.

"The profit decline of the domestic industrial sector is posing great uncertainty to banks," said Lu Xinming, an analyst with Cinda Securities.

This is not alarmist talk. According to official statistics, the combined profit of the 142 largest state-owned enterprises is expected to have fallen 30 percent, to 700 billion yuan last year.

Not just that, but many small and medium-sized enterprises in the coastal areas have gone under during the last several months.

"The slowdown could continue into 2010," said Ha Jiming, chief economist of China International Capital Corporation, a Beijing-based investment bank. The growth rate could slow to 6.5 percent in the first half of 2009, before rising to 8 percent in the second, thanks to stimulus measures announced by the Chinese government, Ha said.

(China Daily February 12, 2009)