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AgriBank Profit Unexpectedly Declines on Lending Curbs

China Banks Said to Underestimate Local Government Lending Risk
Agricultural Bank yesterday unexpectedly posted its first drop in quarterly profit since its 2010 listing after creating more provisions than analysts had estimated. Photographer: Nelson Ching/Bloomberg

Agricultural Bank of China Ltd. posted its first drop in quarterly profit since listing two years ago after credit growth slowed and bad-loan costs climbed. The shares fell to the lowest in more than two months.

Net income declined 14 percent to 21.2 billion yuan ($3.4 billion) for the fourth quarter, from 24.7 billion yuan, according to data compiled by Bloomberg based on full-year figures reported by the Beijing-based lender yesterday. That fell short of the 28.84 billion-yuan average estimate of 20 analysts in a Bloomberg survey.

Shares of Agricultural Bank dropped the most in six weeks on concern that defaults may climb. China’s economic growth cooled last year as the central bank tightened lending restrictions and the government extended property curbs including higher mortgage rates. The slowdown has continued, with factory output in the first two months rising the least since 2009.

“The provision charge for bad loans was more than what’s needed,” said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp. who had a “neutral” rating on China’s banking sector. “That raises the red flag of potential asset-quality deterioration.”

Bad Loans

Agricultural Bank, which had the highest bad-loan ratio among the nation’s five biggest lenders at the end of the third quarter, set aside 22.8 billion yuan of provisions for soured debt in the fourth quarter, more than double the year-earlier figure. Non-performing loans fell to 87.4 billion yuan as of Dec. 31 from 87.9 billion yuan at the end of the third quarter.

“This was a prudent measure as it was driven by collective charges as they take advantage of robust profits now to expand buffers for later,” Keefe, Bruyette & Woods Asia Ltd. analysts led by Warren Blight wrote in a note today. They maintained the outperform rating on the stock while cutting 2012 to 2013 profit forecasts on the lender by 1 percent and 5 percent respectively.

Shares of Agricultural Bank fell 3.1 percent in Hong Kong to HK$3.41 as of 11:34 a.m., trimming this year’s gain to 2.1 percent and making it the second-worst performer among the nine mainland banks listed in the city.

The People’s Bank of China this week moved to expand rural credit by cutting reserve requirements for 379 branches of the bank, expanding an earlier trial and freeing up a total of 23 billion yuan for lending.

The bank had 5.63 trillion yuan of loans outstanding at the end of December, an increase of 14 percent from the beginning of the year. Loan growth was the slowest in three years after policy makers boosted borrowing rates, raised capital requirements and imposed restrictions on credit to home buyers, property developers and local-government financing vehicles.

Economic ‘Trough’

“The first quarter will be the trough for the economy and banks face a real test on their risk-management capability,” said Xie Jiyong, a Shanghai-based analyst at Capital Securities Corp. “Agricultural Bank, given its relatively weaker fundamentals compared with its bigger rivals, still has a lot to learn and improve.”

Song Xianping, chief risk officer at Agricultural Bank, told reporters in Beijing yesterday that risks at some borrowers may rise this year as liquidity tightens.

Loans to local government financing vehicles accounted for 7.1 percent of total advances, Vice President Pan Gongsheng said at a press conference in Hong Kong yesterday. The bad-debt ratio on such credit stood at 1.45 percent, he said.

Core Capital

Agricultural Bank’s capital adequacy ratio widened to 11.94 percent as of Dec. 31 while its core ratio stood at 9.5 percent, meeting the minimum under new rules. The China Banking Regulatory Commission said in August it would require the most important lenders to have a minimum capital adequacy ratio of 11.5 percent by the end of 2013.

Smaller rival Bank of Communications Co. said last week it plans to raise 56.6 billion yuan in the world’s biggest share sale since May to boost capital. Agricultural Bank’s core capital ratio would be the lowest among the nation’s five biggest banks after Bank of Communications’ planned offering.

The lender has no plans for equity raising this year, President Zhang Yun told reporters in Beijing yesterday.

Fourth-quarter profit at Agricultural Bank was derived by subtracting nine-month profit from 2011 earnings reported yesterday. The company posted a 29 percent increase in full-year net income to 121.9 billion yuan, according to the statement.

Agricultural Bank’s net interest income rose 27 percent to 307.2 billion yuan in 2011 after the net interest margin widened to 2.85 percent. Fee income from services including credit cards, trade finance and custodial services rose 49 percent to 68.8 billion yuan.

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