ICBC 1Q Profit Rises 12% on Fee Income, Beats Estimates

China’s four largest banks, among the world’s 10 biggest by market value, defied a sluggish economy to report record quarterly profits in the first three months after boosting lending and fee-based services.

Combined net income at Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, and its three closest domestic rivals rose 11 percent to 215 billion yuan ($35 billion), according to their earnings statements. Earnings exceeded analysts’ estimates at all four Beijing-based banks.

The biggest lenders are taking advantage of their nationwide branch networks and customer base and maintaining pricing power for loans, even as the economy slowed below 8 percent for the longest streak in at least 20 years. Profit may grow by less than 10 percent this year for the first time since the lenders sold shares to the public in the last decade as China deregulates interest rates and defaults rise, according to analysts’ forecasts compiled by Bloomberg.

“As long as loan growth remains at robust but not too aggressive levels, the banks will have further earnings upgrades,” said Sandy Mehta, chief executive officer of Value Investment Principals Ltd., which doesn’t hold shares of mainland banks. “Investor sentiment on the Chinese banks is overly cautious.”

Shares of nine Hong Kong-listed Chinese banks have gained an average 0.2 percent this year, outperforming a 0.5 percent decline in the benchmark Hang Seng Index.

Lending Growth

China’s banks advanced 2.76 trillion yuan of new loans in the first three months, 12 percent more than a year earlier, the second highest level on record, government data show. ICBC extended 461 billion yuan of new loans in the first quarter, 25 percent more than the same period a year ago.

ICBC, the world’s largest lender by market value, yesterday reported a 12 percent increase in first-quarter earnings to 68.7 billion yuan, while China Construction Bank Corp., the second-largest, posted a 16 percent increase. Net income rose a better-than-expected 8.2 percent at both Agricultural Bank of China Ltd. and Bank of China Ltd.

“Chinese banks this year will need to rely on expanding the scale of lending to bolster income growth as there are pressures on loan profitability,” said Wilson Li, a Shenzhen-based analyst at Guotai Junan Securities Co. “Chinese banks are in an economic cycle where bad loans are climbing. As long as the increase is slow and gradual, that shouldn’t be a concern.”

ICBC’s non-performing loans rose to 80.2 billion yuan as of March 31 from 74.6 billion yuan at the beginning of the year as smaller borrowers struggled for repayment. Bad loans also rose at Construction Bank and Bank of China Ltd., according to their statements. At Agricultural Bank, the balance decreased by 165 million yuan in the first quarter to 85.7 billion yuan, or 1.27 percent of total advances, according to yesterday’s statement. All four are majority-owned by the government.

Solar Bankruptcy

Suntech Power Holdings Co. said March 20 it wouldn’t oppose a bankruptcy petition filed by eight Chinese banks, including ICBC, Bank of China and Agricultural Bank, against the solar manufacturer’s main unit. The Wuxi-based company had more than $2.2 billion of debt at the end of March 2012.

China’s economy grew 7.7 percent in the first quarter, trailing the median forecast of 8 percent in a Bloomberg survey, as gains in factory output and consumption weakened, jolting stocks and commodities markets worldwide.

The China Banking Regulatory Commission last month told banks to limit investments of client funds in credit assets that aren’t publicly traded and to isolate the risks from their operations. Wealth management products increased 56 percent to 7.1 trillion yuan last year, equivalent to 7.6 percent of total deposits, according to official data.

Chinese banks rely on such products, which pay higher rates than regulated deposit accounts, to retain savers as interest rate deregulation accelerates and clients divert savings to other types of investment.

Deposit Premium

The People’s Bank of China in June allowed banks to pay a premium of as much as 10 percent over the central bank’s benchmark rate on standard deposits. Unlike many of their competitors, the five biggest state-owned lenders aren’t offering the maximum rate allowed.

“Big banks with a strong deposit franchise and customer base may fare better” than the rest of the industry this year. said Tan Hui, a Beijing-based analyst at Founder Securities Co.

The net interest margin narrowed to 2.78 percent at Agricultural Bank in the first quarter from 2.97 percent a year earlier, while it widened at Bank of China and Construction Bank, according to their statements.

The State Council said last month it will take further steps this year to loosen state control over interest rates and the yuan as new Premier Li Keqiang seeks to open up the economy to sustain growth.

— With assistance by Jun Luo

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