ICBC Leads Chinese Banks in Trumping Returns at JPMorgan

China’s largest banks capped a sixth year of record profits by posting a 21 percent average return on equity, more than twice the rate earned by U.S. and European competitors led by JPMorgan Chase & Co.

Industrial & Commercial Bank of China Ltd. and its three major local rivals boosted their combined profits 15 percent to 716.2 billion yuan ($115 billion), filings over the past week show. By comparison, earnings at the four largest U.S. lenders rose 9.6 percent to $51.9 billion while their ROE, a measure of how well the firms invest shareholder funds, averaged about 7.3 percent, according to data compiled by Bloomberg.

Government controls on interest rates and limits on foreign banks’ operations helped buoy profits at China’s state-owned lenders even as the economy slowed. Western rivals, in contrast, were weighed down by regulatory probes and a crackdown on proprietary trading. JPMorgan was hurt by $6.2 billion of trading losses, while HSBC Holdings Plc joined banks fined for offenses from rigging rates to money laundering.

“It’s a very regulated market” in China, Mike Werner, an analyst at Sanford C. Bernstein & Co., said by telephone. “It’s very difficult for foreign banks to expand and that has essentially assured the domestic banks of getting a very healthy portion of the overall business.”

Slowing Economy

China’s banks boosted credit last year to fend off slowing profit growth and the threat of rising defaults after the world’s second-largest economy expanded 7.8 percent in 2012, the slowest pace in 13 years. Growth may accelerate this year and next as the nation ushers in new leaders who plan to continue with reforms, according to the Organization for Economic Cooperation and Development.

Chinese banking shares dropped in Shanghai and Hong Kong today after the banking regulator tightened rules on savings products and the cabinet called for new measures to deregulate interest rates. ICBC fell 2.7 percent to close at 4.01 yuan in Shanghai and lost 0.2 percent in Hong Kong.

Still, shares of the four biggest Chinese banks -- ICBC, China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. -- have gained 28 percent in Hong Kong trading since mid-September as the U.S. announced a third round of quantitative easing and investors bet on an economic recovery.

The return on equity for some global banks, which had exceeded 20 percent from 1997 to 2007, has plummeted to less than 10 percent as the firms bolstered capital levels to meet regulatory requirements while legal costs and slow economic growth weighed on earnings.

‘Remarkably Resilient’

“Chinese banks are in much better shape than their counterparts in most developed countries,” Sandy Mehta, chief executive officer of Value Investment Principals Ltd., said in an interview in Hong Kong. Their “ROEs have been remarkably resilient in the face of a slowing economy,” and will probably be sustained as China’s growth revives, he said.

Among the four largest U.S. firms, the ROE ranged from 13.2 percent at Wells Fargo & Co. to 1.3 percent at Bank of America Corp., the data show. In Europe, the three largest banks by assets -- HSBC, Deutsche Bank AG and BNP Paribas SA -- posted an average ROE of 5.96 percent as their combined profit fell 25 percent to $23.2 billion last year.

Foreign banks have 387 branches in China, compared with about 65,000 operated by the four largest local lenders at the end of 2011, according to the China Banking Regulatory Commission. The global firms held less than 2 percent of banking assets in China and have so far reaped bigger profits from their investment in local lenders than from their own franchises.

Bailout, IPOs

China’s four state-run lenders, all of which are based in Beijing, were transformed from almost insolvent institutions with spiraling defaults a decade ago, with the help of more than $650 billion in bailouts. They went on to raise a combined $64.5 billion through first-time share sales starting in 2005 and now rank among the 10 biggest by market value in the world.

ICBC, the world’s most profitable lender, yesterday reported 15 percent growth in net income for 2012, and a return on equity of 23 percent. Still, its profit growth was the weakest since its shares started trading in 2006.

At Construction Bank, the second-largest, profit grew 14 percent. Agricultural Bank, ranked No. 3, posted a 19 percent increase, while Bank of China’s earnings rose 12 percent.

Combined profits at these lenders may increase 4 percent to $120 billion this year, compared with a 31 percent increase to $67.9 billion for their U.S. rivals, according to analyst estimates compiled by Bloomberg.

Soured Loans

Meanwhile, non-performing loans at Chinese banks increased every quarter in 2012 to hit 492.9 billion yuan as of Dec. 31 from 427.9 billion yuan a year earlier, according to the nation’s banking watchdog. The net interest margin, a measure of lending profitability, at the nation’s 3,800 lenders stood at 2.75 percent in the fourth quarter, compared with 2.7 percent a year earlier, the regulator said.

Changes in economic conditions will show up in banks’ profits and asset quality with a lag of six months to a year, ICBC President Yang Kaisheng said yesterday.