Industrial & Commercial Bank of China (1398) Ltd. led the nation’s biggest banks in curbing defaults in the first quarter, helping alleviate concern that their asset quality may deteriorate following a two-year credit boom.
Bad loans at Beijing-based ICBC, the world’s most profitable bank, dropped almost 4 percent from the end of 2010 as earnings for the three-month period climbed 29 percent from a year earlier, according to an exchange filing yesterday. China Construction Bank Ltd., the world’s second-largest lender by market value, said bad loans fell by 157 million yuan to 64.6 billion yuan as net income increased 34 percent. Bank of China Ltd. (3988), the nation’s third-largest by assets, said such debt fell 1.8 percent as profit climbed 28 percent.
The results show concerns that credit to local governments and developers would lead to a surge in arrears may be overblown. Chinese banks this month were ordered to conduct new stress tests on real estate loans, demand faster repayment on government borrowings and increase deposits set aside as reserves to the highest level in at least two decades.
“The credit outlook for Chinese banks is more optimistic than the market had expected,” said Wilson Li, a Shenzhen-based analyst at Guotai Junan International Holdings Ltd. “Based on the first-quarter non-performing loan ratios, Chinese banks aren’t under pressure to increase provision charges.”
ICBC said its net income climbed to 53.8 billion yuan ($8.3 billion) in the quarter, while bad debt fell to 70.8 billion yuan as of March 31, bringing its non-performing loan ratio to 1 percent. Bank of China reported a non-performing debt ratio of 1.04 percent yesterday, while Bank of Communications Co., the nation’s fifth largest, said such debt was 1.05 percent of total advances.
Shares of the eight largest Hong Kong-traded Chinese banks have outperformed the benchmark Hang Seng Index (HSI) this year. ICBC advanced 14 percent, after dropping 8.4 percent in 2010 as investors became concerned that asset quality and the bank’s capital strength may deteriorate.
Still, China’s real estate market is a “particular source of risk” to the world’s second-biggest economy, the World Bank warned yesterday. Earlier this month, Fitch Ratings said there was a “high likelihood of a significant deterioration” in banks’ asset quality, and that it was “not inconceivable” that the banks’ total bad-debt ratio may climb to 30 percent.
The nation’s policy makers have stepped up measures to limit systemic risks since last year, including requiring banks to move off-balance-sheet assets onto books, set aside more provisions against potential loan losses, raise down-payments on mortgages and increase their capital levels.
Capital Levels Fall
The nation’s banking regulator last month set 2011 targets for capital adequacy ratios at the nation’s five biggest banks above the minimum 11.5 percent ratio, three people with knowledge of the matter said this week.
ICBC’s capital adequacy ratio dropped to 11.77 percent by the end of March, from 12.27 percent three months earlier, as lending climbed even as the government sought to stem credit expansion and inflation. The ratio dropped 20 basis points at Beijing-based Bank of China and 31 basis points at Shanghai- based BoCom. A basis point is 0.01 percentage point.
Demand for loans and fee-based services rose as the Asian nation’s economy grew a more-than-estimated 9.7 percent in the first quarter, helping earnings at ICBC, Bank of China and BoCom exceed analysts’ estimates by an average 5.4 percent in the first quarter.
ICBC’s first-quarter profit is 49 percent more than that of JPMorgan Chase & Co. (JPM), the most profitable U.S. bank. The New York-based lender said earnings in the period climbed to a record after it reduced reserves set aside to cover bad loans, even as net revenue dropped 8.9 percent. At Bank of America Corp. (BAC), the largest U.S. bank by assets, profit fell 36 percent.
Chinese banks are countering a slowdown in credit growth by charging more for corporate and home loans after the central bank raised interest rates four times since October and reduced the money available for lending to curb inflation. The banks are likely to post a 20 percent growth in profits in 2011 and 2012, according to Goldman Sachs Group Inc.
“Another strong quarter has reaffirmed our view that earlier concerns about the banks’ asset quality deterioration are too pessimistic,” said Tang Yayun, a Shanghai-based analyst Northeast Securities Co. “Banking shares may rally by an average 10-15 percent even after the recent increase.”
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