Agricultural Bank of China Ltd., the nation’s third-largest lender by assets, posted a larger-than-estimated 16 percent jump in quarterly profit on higher lending and fee income and improved asset quality.
Net income rose to 39.6 billion yuan ($6.3 billion) in the third quarter from 34.1 billion yuan a year earlier, the Beijing-based lender said in a statement yesterday. That compares with the 37.8 billion-yuan average estimate of 10 analysts surveyed by Bloomberg.
Agricultural Bank joins Bank of China Ltd., the fourth-largest lender, in beating analyst estimates as lending profitability and quality both improved. China’s largest banks have resisted pressure from the government to offer discounts on loans, seeking to protect their margins after the central bank widened the band for lending rates.
“It’s great that banks could manage to lower their bad loan ratios in an economic slowdown without massively expanding their loan books,” said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp. “With the economy improving and banks boosting lending in the fourth quarter, the ratio could drop further by year-end, easing investors’ concerns about asset quality.”
Shares of Agricultural Bank fell 1.5 percent to HK$3.24 in Hong Kong yesterday before the earnings were published. That brings their loss for the year to 3 percent, compared with a 17 percent gain in the Hang Seng Index.
Net interest income grew 8.8 percent to 85.5 billion yuan in the third quarter, while fee income from businesses such as credit cards and custodial services rose 8.4 percent to 19.2 billion yuan.
In the three months ended in June, Chinese lenders’ profits expanded at the slowest pace since 2009 amid an economic slowdown that’s now in its seventh quarter. The People’s Bank of China cut interest rates in June and July and gave banks more flexibility in pricing loans and deposits.
Banks are offering savers a premium of as much as 10 percent over the central bank’s benchmark deposit rate as they seek to revive slowing deposit growth.
The new interest rate rules may cut banks’ 2012 profits by 28.5 billion yuan, or 3 percent of last year’s figure, Moody’s Investors Service predicted. Banks’ net interest margins may contract by four to six basis points this year, followed by a further 10 to 13 basis points, and a profit reduction of 79.6 billion yuan, in 2013, the ratings company said Oct. 16.
Set up by Mao Zedong in 1951 to finance rural cooperatives, Agricultural Bank was the first commercial lender established in China under Communist rule.
The bank had 350 million customers and 23,465 domestic outlets at the end of June, more than any competitor. More than half of its locations are in less developed areas, contributing about 39 percent of first-half operating income.
Agricultural Bank’s net interest margin, a measure of lending profitability, widened to 2.82 percent in the first nine months, up two basis points from a year earlier.
Bank of China on Oct. 25 posted a better-than-expected 17 percent increase in third-quarter profit as its lending margin improved.
“Loan pricing power remains relatively strong,” Stanley Li, a Hong Kong-based analyst at Mirae Asset Securities (HK) Ltd., said in an e-mail. “The margin trend will likely deteriorate in the fourth quarter and early next year as the effect of loan re-pricing kicks in. The favorable non-performing loans and provisioning trends may not look sustainable amid an economic downturn.”
Outstanding loans at Agricultural Bank stood at 6.2 trillion yuan at the end of September, an increase of 616 billion yuan from the beginning of the year. The bank set aside 10.8 billion yuan against potential soured assets in the third quarter, a decrease of 21 percent from a year earlier.
Agricultural Bank’s non-performing loans fell to 83.95 billion yuan from 84.5 billion yuan in June, representing 1.34 percent of total loans. The average ratio for the country’s commercial banks was below 0.97 percent at the end of September, the Financial News reported on Oct. 20, citing data from the China Banking Regulatory Commission.
The lender’s core capital adequacy ratio stood at 9.76 percent as of the end of the third quarter, exceeding the 9.5 percent minimum imposed by the China Banking Regulatory Commission for systemically important banks under a rule to be phased in next year.
Central Huijin Investment Ltd., a unit of China’s sovereign wealth fund, this month bought more shares in Agricultural Bank and Bank of China, along with the two largest lenders, Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. Huijin owns 40.16 percent of Agricultural Bank after the latest purchase.
The lender is trading at about 6 times its earnings, compared with a record low of 4.73 last year and a lifetime high of 12 times in November 2010.
China’s economy has started to stabilize and will continue to show positive changes, and the government is confident of achieving annual growth targets, Premier Wen Jiabao said this month, after the third quarter ended.
China’s industrial-output growth will be faster in the fourth quarter than in the previous three months, helping the nation achieve its 7.5 percent target for economic expansion in 2012, Zhu Hongren, chief engineer at the Ministry of Industry and Information Technology, said on Oct. 25. The economy expanded 7.4 percent in the third quarter.