Bank of China Profit Increases 8.2% on Lending Margins

Bank of China Ltd. and Bank of Communications Co., the nation’s fourth- and fifth-largest lenders, posted record quarterly profits as they boosted income from loans and fee-based services.

Net income at Beijing-based Bank of China climbed 8.2 percent to 39.8 billion yuan ($6.5 billion) in the first quarter, in line with the 39.2 billion-yuan median estimate of nine analysts surveyed by Bloomberg News, the lender said yesterday. Profit at Shanghai-based Bank of Communications grew by a faster-than-expected 12 percent to 17.7 billion yuan.

China’s five biggest commercial lenders delivered profit growth and return on equity of more than 10 percent in 2012, even as the economy grew at the slowest pace in 13 years. Banks have used their pricing power in the country’s market for loans to defy pressure on margins from interest-rate deregulation and expanded lending to bring down their bad-loan ratios.

“Chinese banks will definitely experience profit growth again this year, though the rate of increase may be high single-digit instead of the double-digit growth seen in previous years,” Grace Wu, an analyst at Daiwa Capital Markets Hong Kong Ltd., said by telephone today. “While China’s economic growth is bolstering demand for lending and fee-income services, lenders are also enjoying strong loan pricing.”

Bank of China rose 1.7 percent to HK$3.59, the highest in three weeks, at the noon trading break in Hong Kong, bringing this year’s gain to 3.8 percent. Bank of Communications, also known as BoCom, advanced 1.2 percent to HK$6.10, the highest level in a month.

Shares of the nine Hong Kong-listed Chinese banks gained an average 0.8 percent in the first quarter, beating the 1.6 percent decline in the city’s benchmark Hang Seng Index.

Margin Widens

Bank of China’s net interest margin, a measure of lending profitability, expanded to 2.22 percent, according to yesterday’s statement, from 2.11 percent reported a year earlier. Its total loans grew 6.7 percent in the first three months to 7.33 trillion yuan, of which 0.91 percent was non-performing, down from 0.95 percent at the end of December.

BoCom’s soured loans rose 14 percent in the first quarter to 30.7 billion yuan as of March 31, accounting for 0.97 percent of the total. Most of the increase came from the eastern provinces of Zhejiang and Jiangsu, Vice President Qian Wenhui said at a news conference yesterday, adding that he didn’t foresee any systemic risks.

“Traditionally, the first quarter will see stronger lending, and usually the increase will center on the largest state-owned banks,” Rainy Yuan, an analyst in Shanghai at Masterlink Securities Corp., said by telephone. “We are more cautious about smaller banks because they face greater capital constraints.”

Bad Loans

The outstanding amount of bad loans at Chinese commercial banks increased for a fifth straight quarter in the last three months of 2012, the longest deterioration streak since data became available in 2004, to 492.9 billion yuan, the China Banking Regulatory Commission said on March 1. The ratio of soured debt to total loans was 0.95 percent at the end of December, unchanged from three months earlier.

Bank of China plans to sell as much as 60 billion yuan of a new type of bond to replenish supplementary capital by the end of 2015, it said in a separate statement yesterday.

The lender also approved the candidacy of Tian Guoli as an executive director, according to the filing. The former vice chairman of Citic Group was appointed this month as the bank’s party secretary, paving the way for him to become chairman.

Xiao Gang resigned as chairman on March 17 to become head of the China Securities Regulatory Commission after leading the lender for about 10 years.

— With assistance by Jun Luo, and Stephanie Tong

Before it's here, it's on the Bloomberg Terminal.