China Construction Bank Profit Growth Slows on Bad Loan Rise

China Construction Bank Corp. (939)’s third-quarter profit rose 9.4 percent, matching analysts’ estimates for slower growth as bad loans increased and the nation’s second-largest lender paid more to attract deposits.

Net income rose to 56.8 billion yuan ($9.3 billion), the Beijing-based lender said yesterday. Total third-quarter profit at the nine Chinese banks traded in Hong Kong may grow by 11 percent, Deutsche Bank AG estimated before the statement. Industrial & Commercial Bank of China Ltd. (601398), the world’s second-largest by market value, and the rest of the country’s five biggest lenders report on Oct. 30.

Construction Bank boosted profit as a rebound in the world’s second-largest economy fueled demand for loans and fee-based services such as investment accounts and advisory work. Growth in net income slowed to the weakest pace in six quarters as the bank set aside more for soured debt and competition drove the lender to pay savers more for deposits.

“CCB’s results showed that other Chinese banks are also likely to see their profit growth slowing,” said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group. “They’re unlikely to report the strong earnings gains seen in the past few years, because the recent credit boom has created bad loan issues which are now appearing and crimping profit.”

Soured Loans

Chinese banks advanced 40.5 trillion yuan of lending from the end of 2008 through September as the government sought to spur the economy after the global financial crisis. As some of those borrowers defaulted, the industry’s nonperforming loans rose for seven straight quarters through the end of June, the latest period for which official data are available.

Construction Bank set aside 9.29 billion yuan of new provisions against soured debt in the third quarter, compared with 8.26 billion yuan a year earlier, according to the statement. Its nonperforming loans rose to 82.1 billion yuan as of Sept. 30 from 80.3 billion yuan three months earlier.

“We view CCB’s provisioning levels as appropriate” because reserves increased by 3 percentage points to 268 percent of soured debt, while slipping 1 basis point to 2.62 percent of total loans, Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in a note.

Construction Bank shares rose 1.1 percent to HK$5.77 in Hong Kong, trimming their loss this year to 7.2 percent. The city’s benchmark Hang Seng Index has gained 0.7 percent in 2013.

Largest Lenders

Construction Bank is the first Hong Kong-listed Chinese bank to report third-quarter earnings. Along with ICBC (1398), lenders scheduled to report on Oct. 30 include Agricultural Bank of China Ltd. (601288), Bank of China Ltd. and Bank of Communications Co.

The average estimate of 10 analysts compiled by Bloomberg had called for Construction Bank to post net income of 57.2 billion yuan. Earnings per share rose to 0.23 yuan from 0.21 yuan a year earlier, according to the statement.

Construction Bank extended 864.9 billion yuan of new loans in the first nine months of this year, taking the outstanding amount to 8.38 trillion yuan.

Net interest income rose 8.2 percent to 98.9 billion yuan in the third quarter, while fee income, from businesses such as credit cards, trade finance and custodian services, rose 19 percent to 24.6 billion yuan.

Shrinking Deposits

“Loan growth kept momentum but deposit acquisition suffered,” Sanjay Jain, a Hong Kong-based analyst at Credit Suisse Group AG, wrote in a research report today. “The key surprise was deposit growth of -0.3% considering CCB’s better-positioned franchise. It was mainly driven by shrinkage in low-cost demand deposits.”

China’s economic growth rebounded to 7.8 percent in the July-September period, accelerating for the first time in three quarters, as Premier Li Keqiang spurred factory output and investment to meet the government’s expansion goal for 2013. The economy may expand by 7.6 percent this year, the slowest pace since 1999, according to a Bloomberg survey of economists.

China’s policy makers announced the country’s second national audit of local government financing vehicles’ debt on July 28 amid concern that some may struggle to repay borrowings. Provincial and municipal authorities may have more than 20 trillion yuan of debt, former Finance Minister Xiang Huaicheng said in April, almost double the figure given by the National Audit Office in 2011.

China’s big four banks are “well-provisioned” and LGFV loans are limited to 6.1 percent of their loan books through repayments and restructuring, Tracy Yu, an analyst at Deutsche Bank, wrote in an Oct. 21 report.

Construction Bank’s net interest margin in the first nine months, a measure of lending profitability, narrowed to 2.71 percent, down 3 basis points from a year earlier.

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

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

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