Bocom Posts Profit Gain on Lending Even as Bad Debt Climbs

Bank of Communications Co., the Chinese lender part-owned by HSBC Holdings Plc, reported a 5.6 percent increase in second-quarter profit as gains in fee and lending income outweighed provisions for bad loans.

Net income for the three months ended June 30 climbed to 18.1 billion yuan ($2.9 billion) from 17.1 billion yuan a year earlier, the Shanghai-based lender said in a Hong Kong exchange filing today. That compared with the 18 billion-yuan median estimate of 11 analysts surveyed by Bloomberg News. The profit increase was the same as in the first quarter.

The share price of the fifth-biggest Chinese bank has outperformed its four larger rivals in Hong Kong this year, boosted by investors’ expectations for more private investment in the state-controlled lender. At the same time, Bocom has struggled to attract deposits and faces risks from lending in eastern provinces where bad debts have swelled.

“Talk of altering the bank’s ownership structure has improved investor sentiment but we’re yet to see signs of any fundamental change,” Edmond Law, a Hong Kong-based analyst for UOB-Kay Hian Holdings Ltd., said before the release. “The biggest challenges for the bank include intense competition for deposits and rising nonperforming loans.”

Shares of Bocom fell 1.7 percent to close at HK$5.68 before today’s announcement. The stock has gained almost 4 percent this year compared with a 7 percent increase in the benchmark Hang Seng Index.

Weakest Profit

Analysts estimate that Bocom’s profit growth for the quarter will be the weakest of the big five banks. In the second half, the lender may get a boost from having extra cash available to lend after the regulator altered loan-to-deposit requirements in July.

Bad debt is piling up at Chinese banks after a credit spree that began in 2008. The industry’s nonperforming loans reached a five-year high of 694.4 billion yuan, or 1.08 percent of total advances, at the end of June. Bocom’s rose to 38.75 billion yuan from 36.06 billion yuan in the first quarter, according to today’s statement.

The lender’s money set aside to cover future bad loans rose 42 percent from a year earlier to 4.8 billion yuan.

The banking regulator is allowing local governments in Shanghai, Guangdong, Zhejiang, Jiangsu and Anhui to set up asset-management companies to buy bad loans from financial institutions, people familiar with the matter said last month. China already has four national bad-loan managers, including China Cinda Asset Management Co., set up in the late 1990s.

Soured Credit

Bocom’s loans outstanding rose 5.1 percent to 3.4 trillion yuan at the end of June from the start of the year, today’s release showed. Deposits grew 5.3 percent to 4.4 trillion yuan.

Bocom, which is 19 percent owned by HSBC, said last month that it plans to deepen its “mixed-ownership structure.” In an Aug. 2 report, Judy Zhang, a BNP Paribas SA banking analyst in Hong Kong, said that a revamp could improve the lender’s productivity and profitability.

Bocom’s net interest income rose 5.9 percent to 34.9 billion yuan in the second quarter from a year earlier, while its net fee income increased 16 percent to 8.1 billion yuan. The net interest margin, a measure of lending profitability, was 2.39 percent compared with 2.33 percent three months earlier and 2.56 percent a year earlier.

With 1,044 outlets, or about 40 percent of its branch network, in eastern China, Bocom is exposed to default risks in provinces such as Zhejiang, where bad loans have been rising fastest. The bank’s outstanding deposits slipped during the first quarter, highlighting the lender’s struggle to compete with the big four.

— With assistance by Jun Luo

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