ICBC Leads Top China Banks to Record Profit as Economy Slows

Photographer: Tomohiro Ohsumi/Bloomberg

Industrial & Commercial Bank of China Ltd. joined its closest rivals China Construction Bank Corp. and Agricultural Bank of China Ltd. in posting better-than-estimated earnings as they maintained loan growth. Close

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Photographer: Tomohiro Ohsumi/Bloomberg

Industrial & Commercial Bank of China Ltd. joined its closest rivals China Construction Bank Corp. and Agricultural Bank of China Ltd. in posting better-than-estimated earnings as they maintained loan growth.

Industrial & Commercial Bank of China Ltd. led the nation’s biggest banks in posting faster-than-estimated second-quarter profit growth by containing bad loans and selling more wealth management products.

The four lenders, among the world’s nine biggest by market value, reported record combined net income of 216 billion yuan ($35.2 billion), an increase of 15 percent from a year earlier, according to data compiled by Bloomberg News. That accelerated from an 11 percent increase in the first quarter.

China’s biggest banks defied the earnings slowdown seen at smaller rivals by boosting higher-yield loans to small firms while stepping up credit-risk management and nonperforming loan recovery. Their shares are still trading near record-low valuations on concern that an economy set to expand at the weakest pace in 23 years will curb loan demand and spark more defaults.

“The valuations are certainly something that we would become relatively bullish on,” May Yan, a Hong Kong-based analyst at Barclays Plc, said today on Bloomberg Television. “They reflect the long-term overhang on these stocks -- NPLs, interest rate liberalization’s impact on the net interest margin, equity raising, etc. We do see some short-term trading and buying opportunities.”

Buy Recommendations

Yan recommended buying ICBC (1398) and Bank of China Ltd. after their earnings yesterday beat her estimates. ICBC rose 0.4 percent to HK$5.08 in Hong Kong as of 9:32, while Bank of China slipped 0.6 percent to HK$3.26.

Shares of the nine Hong Kong-listed mainland banks have dropped by an average 12 percent this year to near record-low valuations, compared with a 4.2 percent decline in the benchmark Hang Seng Index. (HSI) ICBC and Construction Bank Corp., the nation’s second-largest trade at about 5.4 times their estimated 2013 earnings.

Current valuations indicate the market is pricing in a sustainable return on equity of 9.4 percent, well below the 21.2 percent China banks reported in 2012, Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a note Aug. 28.

‘Unfair’ Comments

Investors’ “noises” on wealth-management products, local-government loans and industries with overcapacity are driving down valuations, and many of their comments are “unfair,” ICBC Chairman Jiang Jianqing told a news conference in Hong Kong yesterday.

Chinese banks had 9.08 trillion yuan of wealth management products, savings vehicles that pay higher returns than deposits and aren’t always kept on lenders’ balance sheets, at the end of June. That’s up from 7.1 trillion yuan at the end of 2012, according to data from the banking regulator.

ICBC had 1.2 trillion yuan of such products outstanding as of June 30, while Bank of China had 687 billion yuan, according to Daiwa Capital Markets Hong Kong Ltd.

Net income at ICBC climbed 13 percent to 69.6 billion yuan, beating the 67.5 billion-yuan median estimate of 11 analysts surveyed by Bloomberg News. Bank of China, the fourth-biggest, reported a 17 percent profit increase yesterday. China Construction Bank Corp. (939) on Aug. 25 posted 10 percent growth in second-quarter net income and Agricultural Bank of China Ltd., No. 3 by market value and assets, said on Aug. 28 earnings gained 22 percent.

‘Comforting’ Results

“It’s comforting to see that the big four banks managed to maintain liquidity and earnings ability in the current operating environment,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research, said by phone yesterday. “While the banking industry’s profit keeps rising, the growth rate is slowing. The biggest risk going forward is still the worsening asset quality.”

Combined profit at the four lenders may grow by 7.6 percent this year to $126 billion, the first rate below 10 percent since they sold shares to the public, according to analyst estimates compiled by Bloomberg News. That would still exceed the $72 billion total earnings estimated for their four U.S. counterparts.

“While profit growth at Chinese banks has been slowing, it will be a gradual process as bank loans are still a major financing channel in China,” said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp. “Banks are also boosting their fee-based business and adjusting loan portfolios to resist pressure on income growth.”

Yield Climbs

The yield on AAA-rated five-year commercial bank bonds has climbed 37 basis points to 5.17 percent since the end of March, according to an index from Chinabond, the government debt clearinghouse, signaling growing concern that defaults may rise and funding may remain tight.

China’s banks advanced 2.3 trillion yuan of new loans in the second quarter, according to data compiled by Bloomberg from central bank figures, down 3 percent from a year earlier following a surge in credit in the January-March period. Premier Li Keqiang in June signaled a determination to make better use of existing credit to revive the economy.

“The deterioration of nonperforming loans will depend on how fast the government wants to get rid of overcapacity in some industries,” said Liao Qiang, a Beijing-based senior director at Standard & Poor’s Ratings Services. “The government will consider the ability of Chinese banks in absorbing bad debt. The most likely scenario is that the government will use time to buy more room. It will be a gradual increase.”

Nonperforming Loans

Combined nonperforming loans at ICBC and its four biggest rivals stood at 325.4 billion yuan at the end of June, accounting for 0.97 percent of their total advances, according to the China Banking Regulatory Commission. That declined from 0.98 percent as of March 31.

ICBC’s soured loans rose to 81.8 billion yuan as of June 30 from 80.24 billion yuan three months earlier, according to yesterday’s statement. The ratio of bad debt to total credit was unchanged at 0.87 percent.

Chinese banks have made an unprecedented $6.2 trillion of loans available to state-owned companies, local governments and smaller businesses from the end of 2008 to June this year, according to the central bank.

Total credit, including bank loans and non-bank lending, is about 200 percent of China’s gross domestic product at a time when the economic slowdown is making it harder for borrowers to repay debt, Charlene Chu, a Beijing-based senior director of financial institutions at Fitch Ratings, said in April.

Cash Squeeze

The China Banking Regulatory Commission in March tightened rules on wealth management products. The People’s Bank of China in June also temporarily refrained from providing short-term funds on the interbank market used to finance off-balance-sheet lending and other credit outside the banking system, known as shadow banking.

That drove money-market rates to a record on June 20, cutting off smaller banks’ borrowing. The central bank also ordered lenders to improve their management of funding.

The net interest margin, a measure of lending profitability, narrowed at ICBC and Agricultural Bank in the first half, and was unchanged at Construction Bank.

ICBC chairman Jiang Jianqing forecasts the second-half margin will be stable unless there’s a major change in market rates, he said at a press conference in Hong Kong.

“Credit supply will remain tight in the second half, which may boost banks’ pricing power,” said Xie Jiyong, a Shanghai-based analyst at Capital Securities Corp.

Policy makers are targeting a 7.5 percent economic expansion in 2013 and have accelerated interest rate deregulation by scrapping the lower limit on the lending rates banks can charge customers in July. The reform will hurt lenders’ pricing power on corporate loans and pose significant challenges to banking management, Fu Yuning, chairman of China Merchants Bank Co., said Aug. 26.

Bank of China will lend more to smaller companies to maintain lending profitability, President Li Lihui said at a press conference yesterday.

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; Aipeng Soo in Beijing at asoo4@bloomberg.net

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

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