Bank of China 17% Profit Jump Tops Estimates on Margins

Bank of China Ltd., the nation’s fourth-largest lender by assets, posted a better-than-estimated 17 percent increase in third-quarter profit as its lending margin improved.

Bank of China Ltd., the nation’s fourth-largest lender by assets, posted a better-than-estimated 17 percent increase in third-quarter profit as its lending margin improved.

Net income climbed to 34.8 billion yuan ($5.6 billion), from 29.8 billion yuan a year earlier, according to a statement from the Beijing-based bank yesterday. That exceeded the 32.7 billion-yuan median estimate of 10 analysts surveyed by Bloomberg News.

Profit growth accelerated to the fastest pace in more than a year as China’s largest banks resisted pressure from the government to offer discounts on loans, protecting their margins after the central bank widened the band for lending rates. Bank of China may struggle to maintain earnings momentum as a continued slowdown pushes borrowers to default.

“Bank of China suffers the least from interest rate cuts and interest rate deregulation because it has the largest overseas exposure,” said Timothy Li, an analyst at Core Pacific-Yamaichi International Hong Kong Ltd. “We still see deterioration in asset quality” in the industry.

Net interest margin in the first nine months was 2.12 percent, an increase of 0.02 percentage points from the end of June, according to the statement.

Shares (3988) of Bank of China rose 1.3 percent to HK$3.19 at 9:33 a.m. in Hong Kong, reaching the highest level since May 2 and extending their gain this year to 12 percent. That trails an 18 percent advance in the benchmark Hang Seng Index (HSI) this year.

Overseas Income

Net interest income grew 15 percent to 65.4 billion yuan in the third quarter, while net fee and commission income, from products such as credit cards, fell 1 percent to 15.7 billion yuan, the bank said in yesterday’s statement.

Overseas operations accounted for about 24 percent of Bank of China’s total assets at the end of June, the most among China’s four largest banks. The lender is the only Chinese bank included on the Financial Stability Board’s provisional list of 29 systemically important financial institutions.

“Bank of China’s larger exposure to non-domestic business” means it will be “less affected by the contracting interest rate spread in China,” Sanford C. Bernstein & Co. analysts led by Mike Werner wrote in a note today. “The bank’s efforts in improving its credit profile” are also positive, they wrote.

Bank of China had 599 outlets outside the country with 21,500 employees, in territories including Hong Kong and Macau, as of June 30, according to the bank’s interim report. That compared with 252 locations for Industrial & Commercial Bank of China (601398) Ltd., the country’s largest lender.

Lending Binge

The People’s Bank of China and the China Banking Regulatory Commission aim to avoid a repeat of the two-year, 17.6 trillion- yuan credit boom that propelled economic growth in the country following the 2008 financial crisis. That spending binge fueled inflation and led to three straight quarters of growth in soured loans by the end of June this year, the longest streak of deterioration in eight years.

China’s new lending last month missed analysts’ estimates as Chinese banks sought to avoid accumulating bad loans. Banks advanced 623.2 billion yuan of local-currency credit, the central bank said Oct. 13. That missed the median estimate of 700 billion yuan in a Bloomberg News survey.

Loans Drop

Bank of China extended 575.6 billion yuan of new loans in the first nine months, less than the 587.7 billion yuan offered during the same period a year earlier. Non-performing loans rose to 64.1 billion yuan as of Sept. 30 from 63.6 billion yuan in June, while the ratio dropped to 0.93 percent from 0.94 percent during the last three months.

“Bank of China’s third-quarter result is a high-quality beat, and the core of it is a better margin and asset quality than we had expected,” said Sophie Jiang, a Hong Kong-based analyst at Religare Capital Markets. “It’s too early to draw the conclusion that the whole sector will beat estimates. There’s a delay before bad loans fully reflect the economic slowdown.”

China’s four biggest lenders, all state-controlled, are limiting discounts for their best corporate clients to 10 percent of the benchmark lending rate, bank officials who asked not to be identified said this month.

Agricultural Bank of China Ltd., the third-largest, is scheduled to report earnings after the Hong Kong stock exchange closes today.

Rate Liberalization

The central bank in June allowed lenders to widen the discount on borrowing costs to 20 percent, and then broadened the limit to 30 percent the following month, accelerating the liberalization of interest rates. The banks were permitted to offer deposit rates at 10 percent above the benchmark, the first time a premium has been allowed.

Moves to deregulate interest rates may shrink Chinese banks’ net interest margins, a measure of lending profitability, by four to six basis points this year, Moody’s Investors Service said. That would reduce profits this year by 28.5 billion yuan, or 3 percent of last year’s figure, the ratings company said on Oct. 16.

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: Nathaniel Espino at nespino@bloomberg.net

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