Agricultural Bank of China Posts Slower Profit Growth

Agricultural Bank of China Ltd., the first of the nation’s largest lenders to report 2013 earnings, posted a slowdown in profit growth as government lending curbs offset improving margins and asset quality.

Net income climbed 13 percent to 28.3 billion yuan ($4.6 billion) in the three months ended Dec. 31 from 25 billion yuan a year earlier, according to Bloomberg calculations based on full-year profit reported yesterday to Hong Kong’s stock exchange. That compared with the 27.9 billion-yuan average estimate of 26 analysts surveyed by Bloomberg.

The slowdown foreshadows the challenges that China’s banks face as the government seeks to contain credit growth and industrial capacity in a weaker economy that this month had its first onshore bond default. The bank, whose 420 million customers exceed the population of any country except China and India, reined in bad loans as it stepped up collection efforts and increased write-offs.

“The overall result is quite solid -- margin trend improved in the fourth quarter and asset quality is solid,” Edmond Law, an analyst at UOB Kay Hian (Hong Kong) Ltd., said by telephone. “The concern is about the overall economy in China. We are all expecting that first-quarter gross domestic product numbers won’t be that good.”

Shares of Agricultural Bank, the nation’s third-largest lender by market value, rose 3.1 percent to HK$3.30 as of 10 a.m. in Hong Kong trading. The bank’s full-year profit climbed to 166.3 billion yuan.

Bank of China Ltd., which reports earnings today, rose 2.5 percent, while larger Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, rose 1.8 percent.

Sour Loans

Agricultural Bank has dropped 13 percent this year as slowing growth raised concern that borrowers may be unable to repay debt. China’s economy is forecast to grow 7.4 percent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg News survey.

Agricultural Bank had 87.8 billion yuan of nonperforming loans by December, according to yesterday’s statement, down from 87.9 billion yuan reported at the end of the third quarter.

That helped reduce bad debt as a percentage of total lending to 1.22 percent from 1.33 percent a year earlier. The bank set aside more money for soured assets, boosting the ratio by 40.9 basis points to 367 percent of total NPLs.

Agricultural Bank said net interest margin, a measure of lending profitability, rose to 2.79 percent at the end of last year from 2.74 percent in June.

Set up by Mao Zedong in 1951 to finance rural cooperatives, Agricultural Bank was the first commercial lender established in China under Communist rule. Loans to small businesses rose 24 percent in 2013 from a year earlier, helping drive total lending up by 12 percent to 7.2 trillion yuan. That’s slower than 2012’s loan growth of 14 percent.

Challenging Outlook

The outlook for 2014 may be challenging “given they have a large presence in the rural area, which may limit the pricing and cost-saving strategies for the bank,” Grace Wu, a Hong Kong-based analyst at Daiwa Securities Co., said by phone. “That’s one area where we have seen higher nonperforming loans historically.”

Interest-rate liberalization would further weigh on banks’ funding costs and net interest margins, May Yan, an analyst at Barclays Plc in Hong Kong, wrote in a March 12 note. As part of broader economic reforms, the government is moving to end an interest-rate system that buoyed bank profits by maintaining a spread between what they pay for one-year deposits and charge for loans.

Property Loans

Compounding concerns over banks’ earnings are worries over lending to property developers following the collapse of Zhejiang Xingrun Real Estate Co. this month. The government of Fenghua city, where Xingrun is based, said March 19 it met with officials from six lenders including Agricultural Bank to discuss the company’s debt.

Zhejiang Xingrun’s collapse came after Shanghai Chaori Solar Energy Science & Technology Co., a solar-cell maker, became the country’s first company to default on onshore bonds when it failed to make a full coupon payment on March 7.

China averted its first trust default in at least a decade in January after investors in a troubled 3 billion-yuan high-yield product were bailed out days before it matured.

— With assistance by Aipeng Soo, and Jun Luo

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