ICBC Profit Growth Slows as China Banks’ Overdue Loans Rise

Industrial & Commercial Bank of China Ltd. led the nation’s biggest lenders in posting slower profit growth as a sluggish economy curtailed demand for financial services and more borrowers defaulted on debt.

Net income at ICBC, the world’s largest lender by market value, climbed 11 percent in the second quarter to 61.8 billion yuan ($9.7 billion), according to first-half figures reported yesterday by the Beijing-based company. Combined earnings of China’s five biggest banks increased 13 percent to 203.6 billion yuan in the quarter, slowing from 33 percent a year earlier.

Overdue loans rose at the five banks as the economy decelerated for a sixth quarter, and China’s liberalization of interest rates threatens to squeeze margins in the second half. Still, Chinese banks’ bad-loan ratios are less than 1 percent and they remain among the world’s most profitable, with ICBC alone making more than JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. combined.

“Credit quality of Chinese banks has obviously deteriorated, which is a reflection of the significant decline in the economy,” said Lewis Wan, the Hong Kong-based chief investment officer at Pride Investment Group Ltd., which manages $300 million of assets. “The profit growth will certainly stall some more as lending margins shrink and fee income slows.”

Shares of the five biggest Chinese lenders have fallen by an average 7.4 percent in Hong Kong this year, according to data compiled by Bloomberg. ICBC and its local rivals trade at an average 5.3 times their forecast earnings for 2012, compared with 9.6 times for HSBC (HSBA) Holdings Plc, Europe’s most profitable bank, and 8 times for New York-based JPMorgan, the largest U.S. lender.

Economic Slowdown

China’s two interest-rate cuts this year, three reductions in banks’ reserve requirements since November and accelerated approvals for investment projects haven’t been enough to reverse a slowdown in output.

The economy grew 7.6 percent in the second quarter, the slowest pace since 2009. Barclays Plc, Deutsche Bank AG and Bank of America this month cut their forecasts for the nation’s third-quarter growth, while Morgan Stanley lowered its outlook for 2012 expansion to 8 percent from 8.5 percent.

Bank of Communications Co., China’s fifth-largest lender by assets, yesterday reported a 16 percent increase in second- quarter profit to 15.2 billion yuan. Agricultural Bank of China Ltd. (3988), ranked third, on Aug. 29 posted a 14 percent gain. Net income for China Construction Bank Corp. (939), the second largest, rose 20 percent while fourth-ranked Bank of China Ltd. last week said earnings growth slowed to 5.3 percent.

ICBC gained 0.2 percent to HK$4.20 at the close of trading in Hong Kong, while Bank of Communications added 1.6 percent to HK$5.07. The benchmark Hang Seng Index lost 0.4 percent.

‘Monopoly’ Profits

Premier Wen Jiabao said in April China needs to break the “monopoly” of several big lenders, which make easy profits because it’s hard to borrow money elsewhere. The five banks had 31 trillion yuan of loans outstanding as of June 30, controlling almost half of the nation’s total.

Soured loans at the nation’s 3,800 banks increased for a third straight quarter, the longest streak of deterioration in eight years, according to the China Banking Regulatory Commission. Most of the increase in bad loans came from the eastern Chinese province of Zhejiang, the Shanghai Securities News reported this month.

Overdue Loans

Overdue loans, an indication of future bad loan formation, at the five biggest banks totaled 416 billion yuan as of June 30, an increase of 27 percent from the end of last year, according to data compiled by Bloomberg. ICBC’s advances with payments pending for more than 90 days rose 7 percent to 62 billion yuan, while debt overdue for less than three months surged 60 percent to 80 billion yuan. At Construction Bank, the 90-day figure jumped 34 percent.

“Asset quality will continue to worsen, and the market has been expecting that,” said Ivan Li, head of research at Kim Eng Securities Hong Kong Ltd. “What is uncertain is the banks’ net interest margins” and how much they will shrink.

ICBC’s net interest margin, a measure of lending profitability, widened to 2.66 percent in the first half from 2.6 percent a year earlier. The measure shrank at Bank of China and Agricultural Bank in the second quarter from the previous three months.

Rate Deregulation

The central bank in June allowed lenders to widen the discount on borrowing costs to 20 percent and broadened it further to 30 percent last month as policy makers picked up the pace of interest rate deregulation.

The weighted average lending rate charged by banks had already fallen to 7.06 percent in June, down by 0.56 percentage point from March, according to the central bank. About 8 percent of loans were priced below the benchmark rate that month, the most in 11 months.

Bank of Communications faces “significant” pressure on its margins, Vice President Yu Yali said yesterday at a briefing. ICBC’s first-half loan margin doesn’t yet reflect the impact of the June rate cut, President Yang Kaisheng said.

China’s government is maintaining curbs on real estate and refrained from introducing a nationwide economic stimulus package similar to the one in 2008. Caterpillar Inc., the world’s largest maker of construction and mining machinery, shut its main excavator factory in China for much of July and had employees on shortened work weeks.

Record Profit

In the first six months, ICBC’s profit rose 12.5 percent to 123.2 billion yuan, according to yesterday’s statement, paving the way for it to post record profit for a seventh year since becoming publicly traded in 2006. The second-quarter figures were calculated based on the first-half numbers.

State-run Central Huijin Investment Ltd. bought more Shanghai-listed A shares of ICBC, Construction Bank, Bank of China and Agricultural Bank in the second quarter, Shanghai Securities News reported today, citing their interim reports.

China’s 3,800 lenders reported net income of $52.8 billion in the second quarter, 53 percent more the total earnings of 7,246 U.S. banks, data from the China Banking Regulatory Commission and the U.S. Federal Deposit Insurance Corp. show.

JPMorgan (JPM) last month reported a 9 percent decline in second- quarter net income to $4.96 billion after posting a $4.4 billion trading loss at its chief investment office.

HSBC, the largest European bank by market value, last month posted an 8.3 percent drop in earnings and made a $1.3 billion provision in the first half to compensate British clients wrongly sold payment-protection insurance and derivatives. The London-based lender also made a $700 million provision for U.S. fines after a Senate committee found the bank gave terrorists, drug cartels and criminals access to the U.S. financial system.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net; Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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