China Construction Bank Corp. (939), the world’s second-largest lender by market value, posted better- than-estimated growth in fourth-quarter profit as higher lending income outweighed an increase in bad loan charges.
Net income rose 16 percent from a year earlier to 35 billion yuan ($5.6 billion), according to Bloomberg calculations based on full-year figures released yesterday by the Beijing- based lender. The result exceeded the 34.5 billion-yuan average estimate of 29 analysts in a Bloomberg survey.
Chinese banks are grappling with rising defaults and shrinking lending margins after the world’s second-largest economy expanded 7.8 percent in 2012, the slowest pace in 13 years, and policy makers accelerated interest-rate deregulation. The outlook may improve this year as lenders including Industrial & Commercial Bank of China (601398) Ltd. and Bank of China Ltd. vow to lend more to smaller companies and defend profitability.
“The results affirmed our view that the pessimism over Chinese banks’ earnings since last September was overplayed,” said Luo Yi, a Shenzhen-based analyst at China Merchants Securities. “Bad loans may continue to rise this year as China lowers its pace of growth, but the increase will be fairly modest. Margin contraction may also stabilize as banks adjust their asset mix.”
Although shares of China’s nine Hong Kong-listed banks have gained 22 percent since mid-September as the U.S. announced a third round of quantitative easing, they continue to trade near record-low valuations. China Construction Bank rose 1.6 percent to HK$6.27 as of 9:31 a.m. in Hong Kong, valuing it at about six times its estimated earnings for 2013.
Li Keqiang, who took over as China’s premier this month, said 7.5 percent economic growth is needed to meet targets for 2020, which include doubling per-capita income. Li extended Zhou Xiaochuan’s record tenure as central bank governor, a signal the nation’s new leaders will deepen a shift toward a more market- driven financial system.
The central bank in June allowed lenders to widen the discount on the official lending rate to 20 percent and broadened the limit to 30 percent a month later, picking up the pace of interest-rate deregulation. Meanwhile, banks are offering savers a premium of as much as 10 percent over the benchmark deposit rate as they seek to attract more funds.
Bank loans cost borrowers a weighted average 6.78 percent in December, down 1.23 percentage points from the beginning of the year, according to the central bank. More than 14 percent of yuan-denominated loans were priced below the benchmark lending rate in December, compared with 5 percent in January 2012.
China Construction Bank extended 1 trillion yuan of new loans in 2012, taking the total to 7.5 trillion yuan, according to yesterday’s statement. Its net interest margin widened to 2.75 percent from 2.70 percent a year earlier, the statement showed.
Chinese lenders traded on the Hong Kong exchange may report average profit growth of 17 percent in 2012, Victor Wang and Grace Dai, Hong Kong-based analysts at Macquarie Capital Securities Ltd., wrote in a March 13 note. China Construction Bank is their least preferred large lender because it’s the “most exposed to disintermediation risk” as Chinese companies turn to non-bank financing, such as bond sales.
Construction Bank plans to raise as much as 60 billion yuan to replenish Tier-1 or Tier-2 capital by selling “writedown type” securities, with a maturity of at least five years, by the end of 2015, it said in a separate statement late yesterday.
The lender’s total capital adequacy ratio stood at 14.32 percent as of Dec. 31, compared with 13.87 percent in September.
Fourth-quarter profit at China Construction Bank was derived by subtracting nine-month profit from 2012 earnings reported yesterday. The company posted a 14 percent increase in net income last year to 193.2 billion yuan, according to the statement.
Curbs on borrowing by local governments and efforts to cool the property market are also weighing on asset quality at Chinese lenders. Their non-performing loans have increased for five straight quarters, the longest deterioration streak since the data became available in 2004.
Bad loans at China Construction Bank rose 1.67 billion yuan last quarter to 74.62 billion yuan, accounting for 0.99 percent of total advances. The lender set aside 40 billion yuan against soured debt in 2012.
The bank’s net-interest income rose 16 percent to 353.2 billion yuan in 2012, while fee income rose 7.5 percent to 93.5 billion yuan from areas such as credit cards, trade finance and custodial services.
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