Agricultural Bank of China Ltd., the nation’s third-largest lender by assets, jumped by the most in six weeks in Hong Kong trading after posting third-quarter profit growth that exceeded analysts’ estimates.
Agricultural Bank rose 3.1 percent to HK$3.34 at 3:54 p.m. in Hong Kong, cutting its loss for the year to 0.3 percent after saying on Oct. 26 that profit climbed 16 percent to 39.6 billion yuan ($6.3 billion). That beat the 37.8 billion-yuan average estimate in a Bloomberg survey. China Construction Bank Corp. gained 0.9 percent after the second-largest lender posted profit of 51.9 billion yuan, in line with estimates.
Chinese banks have rallied since mid-September as investors bet that a margin squeeze from interest rate deregulation and deterioration in asset quality may be less severe than earlier predicted. 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.
“We like ABC for its strong deposit franchise and huge provision surplus,” Citigroup Global Markets Inc. analysts Simon Ho and Paddy Pan wrote in a note today. “We estimate that funding costs fell faster than the yield on assets” during the quarter, “most likely because deposits are repricing downwards earlier and faster than loans after the rate cuts” in June and July.
Agricultural Bank’s net interest margin, a measure of lending profitability, widened to 2.82 percent in the first nine months, up 2 basis points from a year earlier, the Beijing-based lender said last week. The indicator rose to 2.74 percent during the same period at Construction Bank, also based in Beijing, an increase of 6 basis points from a year earlier.
China’s banks face further challenges in coming months as a slowing economy cuts into borrowers’ repayment ability and banks reprice loans after the rate cuts, analysts said.
“The third-quarter growth rates of Chinese banks cannot mask their deteriorating operating trends,” said Xie Jiyong, a Shanghai-based analyst at Capital Securities Corp. “Even though big banks are still holding onto their loan pricing power, interest-rate deregulations will eventually hurt everybody’s margins.”
Industrial & Commercial Bank of China, the country’s largest, is scheduled to report tomorrow after markets in Hong Kong and Shanghai close.
The central bank in June allowed lenders to widen the discount on borrowing costs to 20 percent, and then broadened the limit to 30 percent the following month, accelerating the liberalization of interest rates. Banks were also permitted to offer deposit rates at 10 percent above the benchmark, the first time a premium has been allowed.
“The key themes we’ve seen is that big banks’ net interest margin expanded quarter on quarter,” May Yan, a Hong Kong-based analyst at Barclays Plc., said in a Bloomberg TV interview today. “It’s a bit surprising to the market.”
Chinese banking shares have also gained as the U.S. announced a third round of quantitative easing and China’s sovereign wealth fund this month said it increased its stakes in the country’s four biggest lenders.
Profit growth at Bank of China, the fourth-biggest lender, accelerated to 17 percent, according to an announcement last week, the fastest pace in more than a year, taking net income to 34.8 billion yuan compared with a consensus estimate of 32.7 billion yuan.
Bank of China’s overseas operations reduced the effect of a narrower interest rate spread in China, analysts including Mike Werner of Sanford C. Bernstein & Co. said. Foreign operations accounted for about 24 percent of total assets at the end of June.
Banks’ profits may grow by an average 10 percent in the third quarter, slowing from 15 percent in the second quarter and 17 percent in the first three months, Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd., wrote in a note on Oct. 24.
“We do not think the shares are trading on the operating or financial fundamentals of the banks,” he wrote. Many banks “will correct 5 percent to 10 percent after earnings announcements, due to the continuing credit quality overhang.”
Construction Bank extended 769.6 billion yuan of new loans in the first nine months, taking the outstanding amount to 7.3 trillion yuan. Non-performing loans rose to 72.9 billion yuan as of Sept. 30 from 70.4 billion yuan three months earlier, according to the statement.
Agricultural Bank advanced 616 billion yuan of new loans during the same period, while its bad loans dropped to 83.95 billion yuan as of Sept. 30 from 84.5 billion yuan in June.
China’s economy expanded 7.4 percent from a year earlier in the third quarter, compared with 7.6 percent in the April-June period. The International Monetary Fund this month cut its forecast for 2012 global growth to 3.3 percent from a previous estimate of 3.5 percent.
While the four biggest state-owned lenders are limiting discounts on loans to 10 percent of the benchmark borrowing rate, even for their best corporate clients, they are paying more to savers as competition for deposits intensifies.
China’s official one-year lending rate is 6 percent, while the deposit rate is 3 percent after two cuts since June. Construction Bank and its three largest rivals are offering 3.25 percent on one-year deposits.
Construction Bank’s net interest income rose 18 percent to 91.3 billion yuan in the third quarter, while fee income, from businesses such as credit cards, trade finance and custodian services, fell 2 percent to 20.7 billion yuan.