THE five largest banks in China are facing an increasingly daunting balancing act as they try to avoid snapping a streak of rising earnings.

    The banks have managed to keep profits increasing every year since 2004, sending a message about the resilience of China’s financial system. Keeping that trend alive is becoming tougher because of rising bad loans and pressure on lending margins.

    While analysts expect another quarter of profit growth when Bank of China Ltd., Industrial & Commercial Bank of China Ltd. (ICBC), Agricultural Bank of China Ltd., China Construction Bank Corp. and Bank of Communications Co. report earnings this week, it might just be a matter of postponing the inevitable. For the full year, the five are projected to post a 2 percent decline in net income, analysts said.

    A focus on keeping profits rising distracts the banks from addressing deeper issues such as how to rein in new bad loan formation, said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co.

    Most attention will focus on ICBC, the world’s largest lender, which is due to report Friday and faces the toughest challenge in maintaining profit growth. The bank has kept earnings rising this year by letting its bad loan buffer sink below a regulatory minimum.

    ICBC had 196.3 billion yuan (US$29 billion) in nonperforming loans as of June 30, an increase of 20 percent from a year earlier. But it raised total allowances for bad debts by just 5 percent, allowing the coverage ratio to dip below the 150 percent minimum in the first two quarters.

    ICBC would need to set aside another 13.7 billion yuan to bring its bad loan coverage ratio back to 150 percent, which would cut the bank’s full-year profit by almost 5 percent, according to He Xuanlai, a Singapore-based analyst at Commerzbank AG. The Beijing-based lender might choose to keep profit rising even if it means another quarter of missing the required ratio, said Sanford C. Bernstein & Co. analyst Hou Wei.

    “It’s about choosing which profit you want to sacrifice — is it now or is it at some future time,” Hou said.

    Recent signs that bad loans may be stabilizing could offer banks some respite. China’s official bad loan ratio held at 1.75 percent in the second quarter after almost three years of increases, while ICBC reported the first decline in its bad loan ratio since 2012. (SD-Agencies)