China Construction Bank Posts Better-Than-Expected Profit

China Construction Bank Corp., the nation’s second-largest lender by assets, posted a 20 percent gain in quarterly profit as lending and fee income grew and asset quality improved.

Net income climbed to 54.77 billion yuan ($8.6 billion) in the quarter ended June 30 from 45.6 billion yuan a year earlier, based on figures published by the Beijing-based lender yesterday. That beat the 49.9 billion-yuan average estimate of 16 analysts surveyed by Bloomberg.

Construction Bank, which posted profit growth of 10 percent or more for 11 straight quarters through December, may struggle to maintain earnings momentum as the slowing economy pushes borrowers to default. Moves to deregulate interest rates, along with easing liquidity after cuts in reserve ratios and borrowing costs, could also reduce banks’ pricing power on loans.

“We would characterize CCB’s second-quarter earnings results as the strongest” among peers that have reported so far, Sanford C. Bernstein & Co. analysts led by Mike Werner wrote in a note today. “The continued economic uncertainty and concern over deteriorating credit quality will result in the more defensive and larger names (like CCB) outperforming their peers and the market.”

Shares of Chinese banks are trading close to record-low valuations in Hong Kong. China Everbright Bank Co. said yesterday it plans to postpone its Hong Kong listing, citing a “sluggish capital market,” the global economy’s slow recovery, “relatively low” valuations for banking shares and the European debt crisis.

Borrowers Disappear

About 17 of the 47 business owners reported to have disappeared last year to escape loan repayments were Construction Bank clients, the South China Morning Post reported in May, citing President Zhang Jianguo. The lender is owed about 3 billion yuan by Zhejiang Zhongjiang Holding, which is under debt reorganization after filing for bankruptcy, Financial News reported last month.

Shares of Construction Bank slipped 0.8 percent to HK$5.22 in Hong Kong trading. They have lost 3.7 percent this year after declining 22 percent in 2011. The benchmark Hang Seng Index lost 14 percent in the same period.

Slowing Economy

China’s economy expanded last quarter at the slowest pace in three years as Europe’s debt crisis crimped exports and the government’s crackdown on property speculation cooled domestic demand. The slowdown may extend into a seventh quarter, with Deutsche Bank AG cutting its growth estimate for the three months through September to 7.5 percent from 7.9 percent. HSBC Holdings Plc on Aug. 24 lowered its outlook for the full year to an 8 percent expansion, down from 8.4 percent.

The nation’s banks doled out 4.86 trillion yuan of new loans in the first half, an increase of 16 percent from the same period a year earlier.

Growth in new lending this year will be slightly higher than in 2011, President Zhang Jianguao said at a news conference in Hong Kong today.

The China Banking Regulatory Commission told lenders last month that lack of funding, high leverage and a peak of maturing loans have increased the risk that some developers’ financing chains may collapse, a person with knowledge of the matter said on Aug. 17.

For the first six months, Construction Bank’s profit rose 14.5 percent to 106.3 billion yuan, after the lender set aside 14.7 billion yuan against soured loans, 6 percent more than the same period a year earlier. Smaller rival Bank of China Co. last week posted a 5.3 percent increase in first-half net income to 34.8 billion yuan.

Interest Rates

The People’s Bank of China cut interest rates for the first time in three years on June 7 and announced a second reduction less than a month later. The central bank also gave lenders permission to pay as much as 1.1 times the officially established deposit rate and give discounts as deep as 30 percent on loans.

“Banks will feel the pain of the margin squeeze once the impact of the monetary policy loosening and the interest rate liberalization fully kick in next year,” said Wilson Li, a Shenzhen-based analyst at Guotai Junan Securities Co. He expects profit growth of all Hong Kong-listed Chinese banks to drop to “single digits” in 2013.

The bank is increasing non-lending income and adopting other measures to cope with the effects of liberalization, Vice President Hu Zheyi said at today’s news conference.

Construction Bank’s net interest income, the difference between what it pays on deposits and receives on loans, rose 16.5 percent in the first half to 169.7 billion yuan as the net interest margin widened to 2.71 percent. Income from fee and commission services, such as bank cards and custodian services, rose 3.3 percent to 49.2 billion yuan.

— With assistance by Jun Luo

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