Industrial & Commercial Bank of China Ltd. (1398), the world’s most profitable lender, posted the slowest earnings gain in more than four years as nonperforming loans increased while lending and fee income growth slowed.
Net income climbed to 67.2 billion yuan ($11 billion) from 62.4 billion yuan a year earlier, the Beijing-based lender said in an exchange filing today, missing the 69.4 billion-yuan average estimate of 10 analysts surveyed by Bloomberg News. Profit at Agricultural Bank of China Ltd., the third-largest, and Bank of China Ltd. matched analyst estimates.
The increase in soured debt follows efforts by Premier Li Keqiang to cut capacity in industries that have ballooned during a five-year lending boom. China’s biggest state banks are trading near record-low valuations as investors price in a surge in nonperforming loans and weaker profitability amid an economic slowdown and the government’s push for deregulation.
“There’s intensifying profitability pressures for the sector on a quarter-on-quarter basis” amid margin pressure, higher NPLs and slower lending growth, said Ismael Pili, head of Asia bank research at Macquarie Group Ltd. in Hong Kong. “The question is how the banks will fare going forward in a tougher environment.”
ICBC shares rose 2.4 percent to HK$5.47 before today’s announcement, narrowing this year’s loss to 0.6 percent. The stock is valued at 1 times its estimated book value for 2014.
Unprecedented credit growth in China since late 2008 has led to overcapacity in industries from steel and solar power to shipbuilding. Rising interest payments have overwhelmed some borrowers, pushing nonperforming loans up for seven straight quarters through June, according to data from the China Banking Regulatory Commission.
ICBC had 87.4 billion yuan of bad loans as of Sept. 30, according to today’s statement, an increase from 81.8 billion yuan at the end of June. The lender’s third-quarter earnings growth was the slowest since the second quarter of 2009, when it posted a decline. Profit missed analysts’ estimates for the first time in five quarters.
Agricultural Bank posted a 15 percent increase in third-quarter profit to 45.6 billion yuan. That compared with the 44.1 billion-yuan average estimate of 11 analysts surveyed by Bloomberg News. Bank of China, the nation’s fourth-biggest lender, reported quarterly net income of 39.5 billion yuan, in line with the 38.9 billion-yuan estimate of 10 analysts.
Bank of Communications Co., China’s fifth-largest, posted a 3.4 percent increase in profit to 13.9 billion yuan, missing the 15 billion-yuan average estimate of 11 analysts.
The nation’s top leaders will meet next week to map out economic policies. Gross domestic product growth may slow to 7.1 percent in 2014 from 7.6 percent this year as the government focuses on rebalancing the economy and implementing reforms, according to a Barclays Plc report on Oct. 18.
“There’s a lot of uncertainty on where policy will be heading next year, such as interest-rate reform,” said Liu Jun, a Wuhan-based analyst at Changjiang Securities who has a “hold” recommendation on the industry. “That will reduce the appeal of banking shares even though their earnings growth is quite stable and valuations are low.”
China’s central bank continued liberalizing interest rates this year by removing a floor on what banks can charge for loans. Policy makers will probably wait at least two years before requiring lenders to pay market rates on deposits because officials will avoid disrupting the financial system as the economy slows, analysts surveyed by Bloomberg News said last month.
Chinese banks advanced 2.2 trillion yuan of new loans in the third quarter this year, 18 percent more than the same period a year earlier, according to data from the central bank. The government in June signaled a determination to make better use of existing credit to revive the economy.
The nation’s debt-to-GDP ratio, excluding central government and financial debt, widened to 207 percent at the end of the third quarter from 190 percent a year earlier as credit growth continued to outpace productivity gains, Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein, said this month.
The yield on AAA-rated five-year commercial bank bonds has climbed by about 80 basis points to 5.55 percent since the end of June, according to an index from Chinabond, the government debt clearinghouse, signaling growing concern that defaults may rise and liquidity will be tightened.
China’s benchmark money-market rate rose to a four-month high even after the central bank injected funds for the first time in almost two weeks yesterday.
ICBC’s net interest income rose 4.1 percent to 111.7 billion yuan in the third quarter, compared with 5.8 percent growth in the first half. Fee and commission income from services such as sales of wealth management products increased 13 percent to 28.1 billion yuan, slowing from a 23 percent increase in the first half.
Combined profit at the four lenders may grow by 10 percent this year to $129 billion, according to analyst estimates compiled by Bloomberg News, the slowest rate since at least 2009, the earliest year comparable figures are available. That would still exceed the $66.7 billion total earnings estimated for their four U.S. counterparts.
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