China Construction Bank Corp., the nation’s second-largest lender, posted the smallest profit increase in five quarters, weighed down by rising bad-loan charges as the economy slowed.
Net income in the second quarter climbed 9.7 percent to 60.1 billion yuan ($9.82 billion) from 54.8 billion yuan a year earlier, based on figures published by the Beijing-based lender yesterday. That compared with the 58.2 billion-yuan median estimate of 11 analysts surveyed by Bloomberg.
The earnings slowdown reflects the pressure Chinese banks face from higher nonperforming loans and weak credit demand as the world’s second-largest economy heads for the slowest pace of expansion in 23 years. Combined net income at the bank and its three largest competitors may grow by less than 10 percent this year for the first time since they sold shares to the public, analyst estimates compiled by Bloomberg News show.
“The key downside risk for CCB is continued asset deterioration in the Yangtze River Delta, as CCB has a greater concentration of NPLs from that region” than its three largest peers, Grace Wu, an analyst at Daiwa Capital Markets Hong Kong Ltd., wrote in a research note today.
First-half pretax profit from the region fell 7 percent from a year earlier to 19.4 billion yuan, as soured loans jumped 22 percent from the end of 2012, they wrote.
Bank of Communications Co., the nation’s fifth-largest, said Aug. 21 second-quarter net income rose 13 percent, beating analyst estimates as fee income from services such as sales of wealth management products and credit cards jumped 30 percent.
Shares of Construction Bank gained 0.7 percent to close at HK$5.83 in Hong Kong, trimming this year’s decline to 6.3 percent. That compares with a 2.9 percent drop in the benchmark Hang Seng Index in 2013.
Construction Bank, partly owned by Temasek Holdings Pte, Singapore’s state-owned investment company, doled out 583 billion yuan of new lending in the first half to take its total to 8.1 trillion yuan at the end of June. Nonperforming loans rose to 80.3 billion yuan from 74.6 billion yuan at the beginning of the year as borrowers struggled to repay debt.
China’s banks advanced 2.3 trillion yuan of new loans in the second quarter, down 3 percent from a year earlier following a surge in credit in the January-March period. Premier Li Keqiang in June signaled a determination to make better use of existing credit and step up efforts to contain financial risks.
“Chinese banks’ asset quality shows no sign of stabilization as the economy remains sluggish,” said Mu Hua, a Guangzhou-based analyst at GF Securities Co. “Bad loans is a lagging indicator therefore we expect the NPL balance to keep rising in the rest of year. The slowdown in loan expansion has also dragged banks’ profit growth and the trend will continue as the central bank keeps the lid on total lending.”
Construction Bank set aside 16.1 billion yuan for potential bad loans in the first half, compared with 14.7 billion yuan a year earlier.
China’s economy will probably grow 7.5 percent in 2013, according to the median estimate of economists surveyed by Bloomberg News last month, as Li expands the role of markets and restructures the economy to reduce dependence on exports and infrastructure spending.
“China’s economic growth is slowing due to the global downturn, but it’s at a rate suitable for China,” Construction Bank Chairman Wang Hongzhang said at a press conference in Beijing today. “If the economic fundamentals become bad, then we will also be affected.”
The lender’s operations in coastal Zhejiang and Jiangsu provinces have already been “badly affected” as local economies slowed, Wang said.
China Rongsheng Heavy Industries Group Holdings Ltd., the country’s largest shipyard outside state control, said July 5 it was seeking help from the government after a plunge in orders forced it to cut production and “restructure” its workforce.
In the first half, Construction Bank’s profit rose 13 percent to a record 119.7 billion yuan, according to yesterday’s statement. Its net interest income gained 11 percent to 187.7 billion yuan after the net interest margin, a measure of lending profitability, was unchanged at 2.71 percent. Fee-based income gained 13 percent to 55.5 billion yuan.
The People’s Bank of China on July 20 scrapped the lower limit on the lending rates banks can charge customers, in the biggest step to move the nation’s financial system toward rates set by the market. The central bank left the cap on deposit rates unchanged, on concern that removing it without further preparations could lead to financial turmoil.
Chinese lenders’ earnings growth may slow to a “high single-digit” rate, Helen Zhu, Goldman Sachs Group Inc.’s chief China strategist, said on July 20. That still exceeds the 4 percent rate estimated for companies in the MSCI China Index, she said.
Temasek has been increasing its stakes in China’s largest lenders since 2011 as U.S. shareholders including Goldman Sachs and Bank of America Corp. sold stock.
Temasek held 7.15 percent of Construction Bank as of June 30, according to yesterday’s exchange filing. Bank of America, which has offloaded Construction Bank shares four times since 2009, still has 2 billion shares in the Chinese lender with a lockup period ending this month.