Aug. 21 (Bloomberg) -- Industrial & Commercial Bank of China Ltd. earned a record 64.5 billion yuan ($9.42 billion) in the first half to become the world's most profitable bank as a focus on domestic lending helped it avoid the global credit crisis.

Net income rose 57 percent, the Beijing-based bank said in a statement today, topping the $7.72 billion earned by closest rival HSBC Holdings Plc. Earnings per share rose to 0.19 yuan.

Chairman Jiang Jianqing has more than doubled ICBC's profit since 2005 as annual economic growth of more than 10 percent bolstered corporate loans and services to the nation's growing number of wealthy people. ICBC's domestic bias shielded it from the U.S. subprime crisis that has led to more than $500 billion of writedowns and losses at financial institutions globally.

``This shows the rise of economic power in China,'' said Yuk Kei Lee, an analyst at Core Pacific-Yamaichi International in Hong Kong. ``ICBC's earnings power has already overtaken other global giants but we need time to see if this achievement can be sustained.''

The shares closed 2.9 percent lower in Hong Kong today. ICBC's Hong Kong shares trade at about 2.5 times analysts' consensus estimates for book value, compared with 0.84 times for Citigroup Inc. and 1.46 times for HSBC's Hong Kong-traded shares. The state-controlled bank's net income may swell to $17.5 billion this year, according to analyst estimates.

Lending Grows

After a government bailout three years ago, ICBC is now the world's biggest bank by market value. It has 16,476 branches nationwide and 112 branches outside China, and 170 million personal customers -- equivalent to the populations of Russia and Canada combined -- offering the potential for growth in services.

Profit matched the 64.8 billion yuan average estimate of eight analysts surveyed by Bloomberg News. ICBC increased lending by 7.1 percent in the first half to 4.36 trillion yuan. Non-performing loans accounted for 2.41 percent of total advances as of June 30, down from 2.74 percent at the end of 2007.

The bank's net interest margin, a measure of lending profitability, widened to 3.01 percent from 2.8 percent in full year 2007, according to today's statement.

The expansion comes after government efforts to cool credit growth by imposing loan quotas, raising interest rates and telling banks to set aside record amounts of deposits as reserves. These measures may start to bite in the second half.

Financial Services

``The biggest risk to the banking industry is the macro economic uncertainty, no banks -- no matter how well managed -- can be immune from a slowdown,'' said Zhang Xiaojun, who manages the equivalent of $1.8 billion at Shenzhen-based Bosera Fund Management Co., including ICBC shares. ``Big banks like ICBC will do better than smaller ones because of their more diversified loan portfolio.''

ICBC's profit rose 41 percent to 31.4 billion yuan in the second quarter from a year earlier. The figure was calculated by subtracting first-quarter earnings from first-half profit. The growth slowed from 77 percent in the first quarter.

``There's still the second half and we'll continue to work hard,'' Jiang Jianqing, Chairman of ICBC, said at a press conference today. ``We're confident to be the most profitable for the full year but we'll have to wait till the end to see who gets the gold medal.''

Global Rivals Struggle

Other banks have posted higher first-half profits in previous years. Citigroup Inc., the largest U.S. bank by assets, earned at least $9.5 billion in the first halves of 2005, 2006 and 2007. Bank of America Corp., the second-largest U.S. bank, earned more than $10 billion in the first halves of 2006 and 2007, as did HBSC, Europe's largest bank, in the first half of last year.

ICBC's net interest income gained 29 percent to 131.8 billion yuan in the first half as income from loans outpaced interest paid on deposits. Net fee and commission income from services such as credit cards, wealth management and insurance sales rose 48 percent to 24.5 billion yuan.

ICBC was the largest national distributor of insurance policies, mutual funds, government bonds and wealth management products in 2007. The bank has diversified into fund management, financial leasing and is now seeking an insurance license. The bank also owns over 1,100 premier wealth management centers to serve high-net worth customers.

Higher Return

ICBC's return on equity is 22.8 percent, higher than HSBC's 13 percent and JPMorgan Chase & Co.'s 8.7 percent. The bank has $1.4 trillion of assets and held $1.21 billion of U.S. subprime- related securities at the end of June. ICBC had written off $702 million on the investments by the end of the second quarter.

It has $2.7 billion of debt issued by Fannie Mae and Freddie Mac, the two biggest U.S. home loan companies, and $651 million of Alt-A residential mortgage-backed securities after cutting such investments by $8 billion in the first half, Jiang said.

By comparison, mortgage-related writedowns totaled $55.1 billion at Citigroup and $44.2 billion at UBS since the start of 2007, according to Bloomberg data, as the worst U.S. housing market since the Great Depression fanned out into credit markets.

Profit at London-based rival HSBC, Europe's biggest bank by market value, fell 29 percent in the first half on record subprime mortgage defaults in the U.S.

The Chinese lender last year overtook Citigroup Inc. as the world's biggest bank by market value. Its Hong Kong-traded shares are the best performer in the Hang Seng Finance Index. ICBC's Shanghai-traded shares have fallen 41 percent.

Goldman Sachs Group, Allianz AG and American Express, which bought a combined 7.2 percent in ICBC in January 2006, nine months before its initial public offering, have seen the value of their investments increase more than fourfold.

To contact the reporters on this story: Luo Jun in Shanghai at at jluo6@bloomberg.net

Last Updated: August 21, 2008 12:23 EDT