ICBC Net Growth Slows as Chinese Bank Buys Turkish Lender

Photographer: Jerome Favre/Bloomberg

ICBC Chairman Jiang Jianqing is struggling to extend eight years of double-digit profit growth as policy makers step up efforts to rein in a credit boom and introduce more competition into the state-controlled banking system. Close

ICBC Chairman Jiang Jianqing is struggling to extend eight years of double-digit profit... Read More

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Photographer: Jerome Favre/Bloomberg

ICBC Chairman Jiang Jianqing is struggling to extend eight years of double-digit profit growth as policy makers step up efforts to rein in a credit boom and introduce more competition into the state-controlled banking system.

Industrial & Commercial Bank of China Ltd. said it will buy Turkey’s Tekstil Bankasi AS as the biggest Chinese lender seeks to counter a credit slowdown at home that led to the weakest profit growth in almost five years.

Net income for the first quarter gained 6.6 percent to 73.3 billion yuan ($11.7 billion), the Beijing-based lender said in a statement yesterday. That compared with the 74.7 billion-yuan median of eight estimates compiled by Bloomberg. The company said it will buy 76 percent of Tekstilbank (TEKST), as the Turkish lender is known, from its parent for $316 million.

The purchase extends state-owned ICBC’s reach overseas as China seeks to increase acceptance of the yuan globally. ICBC Chairman Jiang Jianqing is struggling to continue eight years of double-digit profit growth as authorities step up efforts to curb credit expansion and introduce more competition into the government-controlled banking system.

“They have to go abroad to expand their global reach,” Steven Chan, a Hong Kong-based analyst at Maybank Kim Eng Securities Pte., said by telephone. “That may not help with earnings growth immediately, but it will help with overall synergies on global business.”

Shares of ICBC fell 1.5 percent to HK$4.60 as of 2:43 p.m. in Hong Kong, extending the drop this year to 12.2 percent. The stock is valued at about 4.6 times estimated profit, compared with 10.3 times for the benchmark Hang Seng Index.

‘Sexy’ Sector

The Chinese bank will buy all of GSD Holding AS (GSDHO)’s shares in Tekstilbank and bid for the remainder of the Istanbul-based company, according to ICBC’s statement. The deal will allow ICBC to tap new business amid bilateral trade between the two nations that now exceeds $28 billion, it said.

“If you have the muscle to grow, the Turkish banking sector is very sexy,” Haydar Acun, an asset manager at Sardis Turkish equity fund, said in e-mailed comments from Istanbul. “Maybe with investment ICBC will be able to achieve the growth that has been absent under Tekstilbank’s current ownership.”

GSD, an Istanbul-based financial services and maritime company with a market value of about $145 million, had hired Merrill Lynch to advise on a potential sale of all or part of its stake in Tekstilbank, having failed to reach a sale agreement through advisors BNP Paribas.

Strategic Significance

Tekstilbank shares (1398), which have surged 64 percent this year, advanced 10 percent to 1.76 lira as of 9:51 a.m. in Istanbul. The Turkish lender, established in 1986, has 44 branches, according to its website. Net income climbed 63 percent to 43.8 million liras ($21 million) in 2013.

“The acquisition is part of China’s preparations for renminbi internationalization,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co. “Its strategic significance is bigger than its practical significance.”

ICBC will consider Middle Eastern acquisitions as part of plans to boost earnings from the region by 50 percent this year, Zhou Xiaodong, the lender’s chief executive officer for the region, said in a February interview. The bank is seeking to triple overseas earnings by 2016 and targeting more business with Middle Eastern companies, he said.

Turkey is also attracting interest from other banks overseas. Qatar Islamic Bank said March 26 that it’s in exclusive talks to buy a stake in Asya Katilim Bankasi AS, while Commercial Bank of Qatar agreed to take a 71 percent stake in Turkey’s Alternatifbank AS in March last year.

Construction Bank

ICBC has proposed $4.7 billion of acquisitions in the past five years to help the bank expand in markets including Argentina, Canada and Taiwan, according to data compiled by Bloomberg. The bank said in January it will buy control of Standard Bank Group Ltd.’s London-based markets unit for about $765 million to expand in trading spanning commodities and interest rates to currencies.

ICBC was the last of China’s four biggest banks to report first-quarter earnings. China Construction Bank Corp., the nation’s second-largest lender, on April 27 posted a 10 percent profit gain. Agricultural Bank of China Ltd. and Bank of China Ltd. reported 14 percent increases last week, exceeding analysts’ estimates.

Bank of Communications Co., the fifth-largest lender, yesterday reported a 5.6 percent climb in first-quarter profit to 18.7 billion yuan, in line with analysts’ estimate. The stock dropped 1.6 percent to HK$4.83 in Hong Kong.

Deeper Slowdown

Lending in China is slowing as the government discourages credit to overextended industries and local governments, while cracking down on activity outside the formal banking system to prevent defaults from spurring financial-market turmoil.

The nation’s broadest measure of new credit shrank 9 percent in the first quarter and money supply in March grew at the slowest pace on record, underscoring risks of a deeper slowdown. China’s economy, the world’s second largest, expanded at the slowest pace in six quarters in the January-March period.

ICBC extended 449.8 billion yuan of new loans in the three months, less than the 461 billion yuan advanced a year earlier, the filings showed.

The bank’s nonperforming loans rose to 100.6 billion yuan as of March 31 from 93.7 billion yuan at the end of 2013 as smaller borrowers struggled to repay debt amid credit tightening. Bad loans also rose at Construction Bank (939), Agricultural Bank and Bank of China, according to their first-quarter profit statements.

The average capital adequacy ratio of China’s 17 biggest banks, which account for 61 percent of the nation’s banking assets, may fall to 10.5 percent from 11.98 percent at the end of 2013 if nonperforming loans increase 400 percent in the worst-case scenario, the People’s Bank of China said in its annual financial stability report yesterday.

Sour Debt

ICBC will step up efforts to dispose of bad loans this year through sales and writeoffs as it aims to keep its bad-loan ratio under 1.2 percent, President Yi Huiman told shareholders on April 15. The percentage of sour debt to total lending was 0.97 percent at the end of March, compared with 0.94 percent in December.

Sour debt at Chinese banks increased for the ninth straight quarter at the end of last year to 592.1 billion yuan, the highest level since 2008, data compiled by the China Banking Regulatory Commission show. New nonperforming loans amounted to more than 60 billion yuan in the first two months of this year, compared with 100 billion yuan for all of 2013, China Business News reported on April 9.

Capital Adequacy

ICBC’s net interest income rose 8.5 percent to 115.8 billion yuan in the first quarter from a year earlier, while net fee and commission income gained 10 percent to 37.7 billion yuan, according to yesterday’s statement.

Its common equity Tier-1 ratio was 10.88 percent on March 31, while its total buffer was 13.22 percent. The government requires the biggest Chinese banks to have a minimum common equity Tier-1 ratio of 8.5 percent and total buffer of 11.5 percent by the end of 2018.

ICBC earlier this month said it won approval to calculate capital adequacy ratios under a new system that will reduce the risk-weighting of some assets and comply with Basel III guidelines for global banks.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net; Aipeng Soo in Beijing at asoo4@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net Darren Boey, Dale Crofts

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