BEIJING/HONG KONG () – China’s two largest state-controlled banks warned bad loans could rise and interest margins would shrink, as they posted their weakest quarterly profit growth in more than two years. Industrial and Commercial Bank of China Ltd (ICBC)’s logo is seen at its branch in Beijing, China, March 30, 2016. /Kim Kyung-Hoon/File PhotoTop lender Industrial and Commercial Bank of China (ICBC) reported flat net profit of 58.05 billion yuan ($8.63 billion) for the fourth quarter, the first time it has seen no growth in a quarter since the July-September 2016 quarter. And China Construction Bank Corp, the country’s second-largest lender, posted on Wednesday a 1 percent drop in net profit, its first quarterly decline since the October-December 2015 quarter. While non-performing loan (NPL) ratios edged down by 0.01 percentage points at each bank, both sharply increased their provisions for future bad debt to cushion themselves against a slowdown in the world’s second-largest economy and festering China-U.S trade tensions. “We deeply feel it’s quite difficult to maintain the low bad loan level. There are external factors, our own reasons, problems with multi layers of local governments and other pressure,” said Xu Yiming, CCB’s chief financial officer, in Beijing on Thursday. “Do not think we are doing so well with 1.46 percent NPL ratio. It is very fragile. Once the environment changes, it can increase.” China’s economy grew last year at its slowest pace since 1990, partially due to the trade war and Beijing’s crackdown on financial risks, which raised corporate borrowing costs. To spur growth, Beijing is pushing banks to significantly boost lending to small businesses by at least 30 percent this year – a move that some analysts say could worsen banks’ future asset quality as those borrowers are riskier and more vulnerable to slowdowns. ICBC set aside more than 160 billion yuan in provisions last year and lifted its provisions to 176 percent of its non-performing loans at end-December from 154 percent a year earlier, President Gu Shu said on Thursday. CCB’s ratio rose to 208 percent at end-December from 171 percent a year earlier. “With a slowing economy and with also industrial profits undershooting meaningfully, for us it’s no surprise that provisions will have to go up from here,” said Gaël Combes, Geneva-based head of equities fundamental research at fund manager Unigestion, which has a small holding of Chinese bank shares. ICBC’s board on Thursday approved a plan to sell 80 billion yuan in perpetual bonds to boost capital. Peer Bank of China (BoC), the country’s fourth-largest lender, sold 40 billion yuan worth of perps in January. SHRINKING MARGINS Net interest margin (NIM) – the difference between interest paid and earned by banks and a key gauge of profitability – narrowed at CCB and stayed flat at ICBC, while bankers and analysts say the pressure on NIM will only increase this year. Margins are being squeezed by increased competition for deposits as well as the pressure from Beijing to boost lending but keep borrowing costs down. “We are facing challenges in maintaining NIM this year. It will not be as comfortable as last year,” said ICBC’s Gu, who said the bank would work hard to avoid passing on higher borrowing costs to its clients. A customer waits at a counter of a branch of China Construction Bank Corp (CCB) at its headquarters in Beijing, China, March 31, 2016. /Kim Kyung-Hoon/File Photo“It is not easy for the real economy these days so we will not pursue high pricing on the asset side,” he said. The other three of China’s so-called Big Five state banks, including Agricultural Bank of China Ltd and Bank of Communications Co Ltd,, will report fourth-quarter results after the market closes on Friday. “2019 is bound to be different – acceleration in loan growth, especially to the private sector, but less margin as banks will be pushed to pass on the reduction in cost of funding to their clients especially SMEs,” said Alicia Garcia Herrero, chief economist of Natixis Asia Pacific. Reporting By Shu Zhang in BEIJING, Julie Zhu and Sumeet Chatterjee in HONG KONG; Editing by Jennifer Hughes and Muralikumar AnantharamanOur Standards:The Thomson Trust Principles.