ICBC Net Rebound Exceeds Estimates on Loans, Provisions

ICBC Profit Rebounds, Beats Estimates on Wider Lending Margin
A pedestrian walks past a branch of the Industrial and Commercial Bank of China Ltd. in Beijing. Photographer: Nelson Ching/Bloomberg

Industrial & Commercial Bank of China Ltd. led the nation’s biggest lenders in posting profit that beat analyst estimates, defending their lending margins even as economic expansion slowed to a three-year low.

The combined profit at China’s four largest banks rose 15 percent to 189 billion yuan ($30 billion) in the third quarter, almost triple the amount at the top four U.S. banks and 3 percent more than the average analyst estimate compiled by Bloomberg. Net income at ICBC, the world’s largest bank by market value, rose 15 percent to a record 62.4 billion yuan.

The four state-owned lenders, which account for almost half of China’s loans, have resisted government pressure to offer discounts to borrowers after the central bank narrowed the band between lending and deposit rates. The squeeze on profitability may worsen and defaults may rise further after the world’s second-largest economy decelerated for a seventh quarter.

“The third-quarter results season tells us we do not need to be super bearish for these money-making machines,” Victor Wang, a Hong Kong-based analyst at Macquarie Capital Securities Ltd., wrote in a note today. While banks’ “true” bad loan ratios will continue to edge up and net interest margins will inevitably decline, the lenders “have strong ability to manage their loan portfolio and sticky pricing power.”

Although shares of Chinese lenders have rallied since mid-September, as the U.S. announced a third round of quantitative easing and China’s sovereign wealth fund said this month it will buy more shares, they continue to trade close to record-low valuations.

Shares Underperform

ICBC rose 2 percent in Hong Kong to close at HK$5.13, taking this year’s gain to about 11 percent. China Construction Bank Corp., the nation’s second largest by assets, advanced 2.3 percent, while Agricultural Bank of China Ltd. added 1.5 percent. Bank of China Ltd. gained 2.2 percent. The lenders, based in Beijing, have all underperformed the benchmark Hang Seng Index this year.

Bank of China last week reported a better-than-estimated 17 percent increase in third-quarter profit, while Agricultural Bank of China posted a 16 percent gain, also exceeding analysts’ estimates. Construction Bank’s 12 percent increase was in line with projections.

Bank of Communications Co., the nation’s fifth largest, said yesterday third-quarter profit rose 12 percent to 13.4 billion yuan, compared with an average analyst estimate of 13.9 billion yuan. The stock fell 2 percent in Hong Kong to HK$5.54, the lowest closing price since Oct. 10.

Stable Economy

“Given China’s determination to maintain a stable economic environment, I’m not too worried about banks’ profitability at least in the fourth quarter,” said Ronald Wan, a Hong Kong-based managing director at China Merchants Securities Co. “As the economy seems to have bottomed out and the view on yuan appreciation has strengthened, Chinese banks look attractive to me.”

ICBC’s full-year earnings growth may slow to 8.5 percent as it struggles to rein in bad loans, a Bloomberg survey of analysts shows. The bank has posted growth of at least 10 percent each year since its first public share sale in 2006.

The bank, led by Chairman Jiang Jianqing, 59, had 74.8 billion yuan of non-performing loans as of Sept. 30, a decrease from 75.1 billion yuan three months earlier, according to a statement yesterday.

Repayment risks are higher in the Yangtze River Delta region, where bad loans rose 3.3 billion yuan to 14.6 billion yuan, and among smaller businesses, Deutsche Bank AG analysts Tracy Yu and Judy Zhang wrote in a note today, citing comments by ICBC management during an analyst briefing.

Soured Loans

While soured loans also fell at Agricultural Bank of China, they rose at Construction Bank and Bank of China. Total non-performing loans at the four banks increased 2.1 billion yuan in the third quarter to 295.7 billion yuan, according to their statements.

“China’s economy seems to have bottomed out but there’s usually a time lag before the effect shows up in banks’ non-performing loans,” said Ivan Li, deputy head of research at Kim Eng Securities Hong Kong Ltd.

Chinese industrial companies’ profits dropped 6.2 percent in August from a year earlier, the largest decline this year and the fifth straight monthly deceleration, before gaining 7.8 percent in September, according to the statistics bureau.

Steel Producers

Profit at steel producers and processors tumbled 81 percent during the first eight months to 19.3 billion yuan on overcapacity and sluggish demand from builders and automakers.

Net interest income at ICBC rose 16 percent to 107.3 billion yuan in the third quarter, while income from fee-based services such as credit cards increased 1.5 percent to 24.9 billion yuan, the bank said yesterday.

“ICBC reported the best earnings mix of the big four banks -- with stable net interest margins, steady loan expansion, strongest deposit growth, outperforming credit quality and a strong capital base,” Sophie Jiang, a Hong Kong-based analyst at Religare Capital Markets, wrote in a note yesterday. Jiang has a buy rating on ICBC.

The government has accelerated approvals of investment projects, lowered interest rates and boosted tax support for exporters. At the same time, authorities have refrained from further easing monetary policy since rate cuts in June and July and a May reduction in banks’ reserve requirements.

Seeking Deposits

The central bank in June allowed lenders to widen the discount on the official lending rate to 20 percent and broadened the limit to 30 percent a month later, picking up the pace of interest-rate deregulation. Meanwhile, banks are offering savers a premium of as much as 10 percent over the benchmark deposit rate as they seek to attract more funds.

ICBC’s net interest margin, which measures profitability on loans and other interest-bearing assets, “rebounded” in the first nine months, the bank said in today’s statement, without providing the figure. The measure was 2.67 percent in the first nine months, widening from 2.6 percent in the same period last year, according to an estimate by Sheng Nan, a Hong Kong-based analyst at CCB International Securities Ltd.

The lender attributed the margin improvement to “tighter control on liability costs, stronger loan pricing power, higher investment yields” and a delayed “effect from the loan re-pricing,” according to the Deutsche Bank report. ICBC expects its net interest margin to come under pressure, the analysts quoted executives as saying.

Agricultural Bank

Agricultural Bank’s net interest margin expanded to 2.82 percent in the first nine months, up 2 basis points from a year earlier. The indicator rose 6 basis points to 2.74 percent during the same period at Construction Bank and widened to 2.12 percent at Bank of China.

ICBC may earn a record 226.1 billion yuan this year, according to the average of 32 analyst estimates in a Bloomberg survey, compared with 208.3 billion yuan in 2011. JPMorgan Chase & Co., the largest U.S. bank, may report profit of $20 billion this year, while profit at HSBC Holdings Plc, Europe’s biggest bank, is estimated at $16.4 billion.

The Federal Reserve said in September it would buy $40 billion a month of mortgage debt in a third round of asset purchases known as quantitative easing and hold the main interest rate near zero until at least mid-2015 to boost the economic recovery.

Low interest rates have reduced lending profitability in the U.S. banking industry. JPMorgan’s net interest margin narrowed to 2.43 percent at the end of September from 2.66 percent a year earlier. The measure at Wells Fargo & Co., the U.S. bank with the highest market value, dropped to 3.66 percent from 3.91 percent at the end of June.

— With assistance by Jun Luo, and Stephanie Tong

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