Bank of China’s Overseas Loans Drive Profit as Margins Widen

Bank of China Ltd., the nation’s fourth-largest lender by market value, unexpectedly increased quarterly profit as more loans outside its home country helped it widen interest margins.

Net income rose to 36.7 billion yuan ($5.9 billion) in the three months ended Dec. 31 from 33.5 billion yuan a year earlier, based on full-year figures released by the Beijing-based company yesterday. That beat the 32.8 billion-yuan median of 24 estimates compiled by Bloomberg.

Bank of China boosted overseas lending and benefited at home from a surge in interbank rates to a six-month high in December that made loans to smaller rivals more profitable. Concerns that liquidity is tightening and bad debts may climb in an economy that had its first onshore bond default this month dragged valuations of the largest banks’ shares to record lows.

“The business environment in the second half of last year was pretty good for the banking sector,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co. “Lending margins improved and nonperforming loans stabilized thanks to better economic conditions.”

Bank of China shares in Hong Kong rose 0.9 percent to HK$3.33 as of 9:39 a.m. local time, the highest intraday level since Jan. 29. The benchmark Hang Seng Index dropped 0.2 percent. The bank’s stock, which lost 7 percent this year, trades at 4.8 times estimated profit, compared with 10 times for the Hang Seng Index, data compiled by Bloomberg show.

ICBC Profit

The lender was the second of China’s four largest banks to post earnings this week after Agricultural Bank of China Ltd. While Agricultural Bank also reported improved margins, profit growth at the nation’s third-largest lender slowed for a second quarter amid weaker loan expansion, according to its March 25 earnings statement.

Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, may report fourth-quarter profit of 56 billion yuan today, a 5.9 percent increase from a year earlier, according to a Bloomberg survey of 28 analysts. The earnings are due after Hong Kong and Chinese stock markets close. ICBC shares rose 0.2 percent to HK$4.64.

Bank of China’s President Chen Siqing said at a press conference in Hong Kong yesterday that he’s optimistic over asset quality and profit growth in 2014, especially at the bank’s overseas business.

Corporate loans outside China jumped 20 percent last year, helping drive the lender’s outstanding loans up by 11 percent to 7.6 trillion yuan, according to yesterday’s statement. The growth in total lending is higher than 2012’s 8.2 percent rate.

Overseas Lending

Bank of China’s net interest margin, a measure of lending profitability, widened to 2.24 percent at the end of last year, from 2.22 percent at the end of September. Besides increasing its overseas loan book, the bank also lowered its holdings of low-interest assets to bolster margins, it said.

The overseas businesses’ interest margin rose 15 basis points in 2013 to 1.28 percent from a year earlier, Bank of China said. Total net interest income climbed 10 percent, while net fee income gained 17 percent.

Overseas lending sheltered the bank from government efforts to rein in a credit boom that fueled overcapacity in some industries and inflated borrowings by local governments within China. The expansion in local-currency loans slowed last year to 14 percent, the least since 2005, from 15 percent in 2012, central bank data show.

Cash Crunch

Bank of China’s soured loans rose to 73.2 billion yuan as of Dec. 31 from 72.1 billion yuan three months earlier, according to yesterday’s statement. The ratio of bad debt to total credit was unchanged at 0.96 percent during the period.

Policy makers are trying to reduce the economy’s reliance on debt and mitigate risks in the financial system that could hinder reforms the ruling Communist Party pledged in November to implement. The central bank engineered a cash crunch in June and December to stop excessive lending.

The government has a 2014 growth target of 7.5 percent that may become harder to reach as indicators from industrial output to retail sales cooled more than estimated in January and February. China’s economy, the world’s second largest, expanded 7.7 percent in the fourth quarter and 7.8 percent in the third, faster than the June quarter’s 7.5 percent.

Banks are facing competition for deposits as Tencent Holdings Ltd. and Alibaba Group Holdings Ltd. lure individuals to online financial products.

The competition provides impetus to the development of commercial banks, Zhu Shumin, a Bank of China executive vice president, said at yesterday’s press conference. The lender has paid attention to building an Internet platform including e-commerce services, he said.

— With assistance by Jun Luo, and Aipeng Soo

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