Bank of China Shares Rise as Profit Beats Estimates
March 25, 2011, 5:44 AM EDTBy Bloomberg News
(Corrects share price in second paragraph.)
March 25 (Bloomberg) -- Bank of China Ltd., the nation’s third-largest lender by market value, rose the most in almost five months in Hong Kong trading after reporting full-year profit that beat analysts’ estimates on wider loan margins.
The stock advanced 2.6 percent to close at HK$4.27, after Bank of China said yesterday that net income climbed 29 percent to 104.4 billion yuan ($15.9 billion) in 2010. Earnings were helped by increased loan profitability and lower credit provisions.
Rivals including Industrial & Commercial Bank of China Ltd. also rose in Hong Kong today, as Bank of China’s report spurred optimism that lenders will benefit from higher interest rates. Chairman Xiao Gang, 52, said he plans to further boost loan margins by cutting the cost of capital and raising lending rates.
“After a flat net interest margin for three quarters, its net interest margin finally rebounded,” JPMorgan Chase & Co. analysts Samuel Chen and Cindy Xu wrote in a note today. “We expect a positive stock-price reaction on the results. Long term, we see valuation as attractive.”
Bank of China trades at 1.77 times book value, below the average of 2.17 times over the past four years, according to data compiled by Bloomberg. The Beijing-based lender’s profit beat the 99 billion yuan average of 19 estimates collected by Bloomberg.
Wider Margins
China’s central bank has raised interest rates three times since mid-October to contain inflation as the nation’s economy grew to overtake Japan’s as the world’s second largest in 2010. That’s helped push banks’ loan margins higher because their funding costs haven’t risen at the same pace.
Bank of China’s net interest margin widened to 2.07 percent last year from 2.04 percent in 2009. The gap expanded 10 basis points in the fourth quarter from the previous three months to 2.14 percent, according to Credit Suisse Group AG. A basis point is 0.01 percentage point.
Bank of China President Li Lihui said he expects further interest rate increases and tighter liquidity this year, adding that he’s “confident” the lender’s net interest margin will improve. Loan profitability in the first two months of 2011 was similar to that of the fourth quarter, he said.
“China’s banks should be thankful that the government put on the brakes while the economy is still expanding and demand for loans remains strong,” said Sophie Jiang, a Beijing-based analyst at CCB International Securities Ltd.
Payout Ratio
ICBC, the world’s largest bank by market value, rose 1.9 percent in Hong Kong while China Construction Bank Corp. gained 2 percent. All Chinese lenders traded in the city advanced.
Bank of China extended 750 billion yuan of local and foreign-currency denominated new loans last year, taking the outstanding amount to 5.66 trillion yuan, an increase of 15.3 percent from the end of 2009. The company forecast loan growth of at least 10 percent for 2011.
China’s Hong Kong-listed banks may increase net interest margins by an average 17 basis points this year and another 15 basis points in 2012, compared with a 6 basis point increase last year, according to Mike Werner, an analyst at Sanford C. Bernstein & Co.
Bank of China cut its dividend payout ratio last year to 39 percent to preserve capital, compared with 44 percent in 2009 and 51 percent in 2008. The reduction came after the bank regulator forced lenders to set aside more provisions against loans and boosted minimum requirements for capital strength.
‘Public Protest’
“We view this as a public protest to the regulator’s tightening on banks’ capital adequacy and other requirements such as provisioning,” BNP Paribas SA analysts Dorris Chen and Ellie Li wrote in a note yesterday. The move “reduces the attractiveness of China banks as a high-yield defensive play.”
Bank of China targets a payout ratio of 35 percent to 45 percent over the next three years and aims to maintain the level at about 40 percent to support long-term growth, Li said.
The bank reported almost 13 billion yuan of impairment losses on assets for 2010, including provisions for potential non-performing loans and a reversal of earlier charges for overseas mortgage investments, compared with 15 billion yuan a year earlier. The balance of its non-performing loans dropped for an eighth year to 62.47 billion yuan as of December, accounting for 1.1 percent of total advances.
--Jun Luo. Editors: Chitra Somayaji, Russell Ward
To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net
To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net
