Oct. 24 (Bloomberg) -- Industrial & Commercial Bank of China Ltd., the world's biggest bank by market value, reported the smallest profit increase since going public two years ago as credit market turmoil and a slowing economy curbed loan demand.

Net income rose 26 percent in the third quarter to 28.2 billion yuan ($4.1 billion), or 0.09 yuan a share, from 22.46 billion yuan, or 0.07 yuan, a year earlier, the Beijing-based bank said in a statement today.

Chairman Jiang Jianqing, who more than doubled ICBC's profit in the past three years, is contending with the slowest economic growth since 2003 and market turmoil that led to almost $660 billion of writedowns and losses at global banks. Earnings grew at less than half the pace of the first six months, and ICBC's losses tied to the U.S. subprime market and Lehman Brothers Holdings Inc. swelled to $1.3 billion by Sept. 30.

``All the evidence we've seen, such as a deterioration in asset quality, slower loan growth and contraction of net interest margins, points to a downturn in the banking industry,'' said Li Ming, who manages 9 billion yuan at Dacheng Fund Management Co. in Shenzhen. ``The best period is officially behind us.''

Chinese banks may report a 7 percent decline in profit in 2009 on tighter lending margins and an increase in non- performing loans as the slowing economy drives some businesses out, Citigroup Inc. said last week. Citigroup forecast the non- performing loan ratio of the nation's six largest publicly traded banks will rise 0.74 percentage point to 3 percent.

New Loans

Banks offered 1 trillion yuan of new loans in the third quarter, 10 percent less than the amounted offered in the second quarter and about 25 percent less than that of the first quarter, according to the central bank. China's economic growth slowed for five straight quarters to 9 percent in the third quarter.

ICBC increased lending by 8 percent in the first nine months to 4.29 trillion yuan from the end of last year. Non- performing loans accounted for 2.37 percent of total advances as of Sept. 31, down from 2.74 percent at the end of 2007. The bank set aside 8 billion yuan against potential loan losses in the third quarter.

China's government has eased restrictions on bank lending since July and cut interest rates twice in the past month to stimulate the economy as the worst financial crisis since the Great Depression undermines global growth. The rate cuts hurt profitability on loans.

`More Downside'

``The operating environment for Chinese banks isn't optimistic,'' said Ivan Li, a Hong Kong-based analyst at Kim Eng Securities Ltd. ``Banks are a play on the economy; with economic growth slowing down, it's hard to be positive on banks. Profit growth will continue to slow, there may be more downside on ICBC's shares.''

China Construction Bank Corp., the nation's third-largest by market value, today said third-quarter profit increased 12 percent on higher interest income. Net income climbed to 25.6 billion yuan, or 0.11 yuan a share, the Beijing-based company said in a Hong Kong stock exchange statement.

China this week trimmed costs, including mortgage rates, taxes and down-payments, for first-home buyers to stop a cooling property market from dragging down growth in the world's fourth- largest economy.

Shares of ICBC have dropped 54 percent in Shanghai and 44 percent in Hong Kong this year. The stock closed 7.4 percent lower in Hong Kong today. The benchmark CSI 300 Index is down 67 percent this year.

ICBC's net interest income gained 13 percent to 64.78 billion yuan in the in the third quarter. Net fee and commission income from services such as credit cards, wealth management and insurance sales fell 4 percent to 10.1 billion yuan.

Most Profitable Bank

ICBC in August became the world's most profitable bank after earning a record 64.5 billion yuan in the first half as a focus on domestic lending shielded it from the global credit crunch that started with U.S. subprime-mortgage defaults.

ICBC will be ``cautious'' in buying U.S. debt to avoid losses, and will consider cutting or keeping its subprime holdings depending on prices, Jiang, 55, said last month.

The bank has $1.37 trillion of assets and held $1.87 billion of U.S. subprime-related securities, Alt-A residential mortgage-backed securities and structured investment vehicles at the end of September. The bank also held $152 million of bonds related to Lehman.

Writeoffs on these investments totaled $1.3 billion as of Sept. 30, compared with $702 million at the end of the second quarter. ICBC also marked down the value of investments in debt issued by Fannie Mae and Freddie Mac, the two biggest U.S. home loan companies, by $76 million in the third quarter.

After a government bailout three years ago, ICBC is now the world's biggest bank with a market value of $174 billion, $18 billion more than the closest rival HSBC Holdings Plc. 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.

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

Last Updated: October 24, 2008 11:48 EDT