China’s Agricultural Bank Posts Profit Gain on Margins

Agricultural Bank of China Ltd., the nation’s third-largest lender by market value, posted a 14 percent increase in first-quarter profit as it widened lending margins and boosted income from loans and fee-based services.

Net income increased to 53.4 billion yuan ($8.5 billion) for the three months through March from 47 billion yuan a year earlier, the Beijing-based lender said in a filing to Hong Kong’s stock exchange yesterday. That compared with the 52.4 billion yuan median of eight estimates compiled by Bloomberg.

“Overall, I would say it’s a decent set of results,” Ismael Pili, a Hong Kong-based analyst at Macquarie Group Ltd., said by phone yesterday. “Whether it’s capital, asset quality or liquidity, these guys seem to be ticking the boxes.”

The bank also reported higher bad loans, underscoring the challenge posed to the nation’s largest lenders by China’s slowdown. The economy expanded 7.4 percent in the first quarter, the weakest pace in about 18 months, hurting borrowers’ ability to repay debt in a country that had its first onshore bond default last month.

Shares of Agricultural Bank sank 1.2 percent in Hong Kong to HK$3.21 yesterday before the earnings were reported. The stock slumped 16 percent this year, compared with the benchmark Hang Seng Index’s 4.7 percent drop. Agricultural Bank’s first-quarter profit growth about matched the increase posted by Bank of China Ltd. on April 24.

Loan Growth

Agricultural Bank’s net interest margin climbed 0.18 percentage point to 2.96 percent as of March from a year earlier, the lender said. Net interest income climbed 16 percent to 103.1 billion yuan, while net fee and commission income gained 3.4 percent.

Total lending increased 4.5 percent from the end of 2013 to 7.6 trillion yuan as of March, with corporate loans accounting for 64 percent of the figure, Agricultural Bank said. Set up by Mao Zedong in 1951 to finance rural cooperatives, Agricultural Bank was the first commercial lender established in China under Communist rule.

“Agricultural Bank’s strong rural network enabled it to achieve stable and cheap sources of funding,” Tang Yayun, a Shanghai-based analyst at Northeast Securities Co., said by phone. “That said, the asset quality remains a big concern as the economy is in a down cycle.”

The lender had 92 billion yuan of nonperforming loans at the end of March, according to yesterday’s statement, up from 87.8 billion yuan at the end of 2013. Bad debt as a percentage of total lending was at 1.22 percent, the same level as December.

The bank set aside 13.3 billion yuan as provisions against potential bad loans, a 7 percent increase from a year earlier.

Bond Default

Shares of Agricultural Bank and its three largest peers are trading near record-low valuations on concern loan defaults may rise as the world’s second-largest economy cools. Chinese lenders sour debt increased for the ninth straight quarter in the final three months of last year to the highest level since the 2008 financial crisis, China Banking Regulatory Commission data show.

A Chinese building materials producer this month averted what would have been the second default in the nation’s onshore bond market as its guarantor pledged to fulfill its responsibilities. Closely held Xuzhou Zhongsen Tonghao New Board Co., based in the eastern province of Jiangsu, missed a 10 percent coupon payment due March 28 on 180 million yuan of notes sold last year.

China’s onshore bond market experienced its first default in March when Shanghai Chaori Solar Energy Science & Technology Co. missed payment on its debt.

Capital Ratios

Agricultural Bank said its capital adequacy ratio was 11.87 percent at the end of March, while its Tier 1 ratio was 9.48 percent. Under rules that took effect in January 2013, systemically important banks need to have a minimum Tier 1 ratio of 9.5 percent, with overall buffers of 11.5 percent before the end of 2018, according to the China Banking Regulatory Commission.

The nation’s four biggest lenders will face a capital shortfall of 538 billion yuan by 2019 under the new requirements, Mizuho Securities Asia estimates. At least half the total may be raised from share sales, Jim Antos, a Hong Kong-based analyst at Mizuho, wrote in a March 25 report.

Agricultural Bank plans to sell 80 billion yuan of preferred shares, Caixin magazine reported April 14, without citing anyone. That class of stock, available under a trial approved by regulators last month, permits banks to raise capital without selling dilutive common equity. The shares can be converted into common stock if capital ratios fall below a certain level.