Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. (3988) posted better-than-estimated profit growth in the fourth quarter as income from loans and fee-based financial services outpaced an increase in defaults.
ICBC widened its lead as the world’s most profitable lender after reporting a 17 percent increase in net income to 44.4 billion yuan ($7 billion). That compared with the 43.4 billion- yuan average estimate of 22 analysts in a Bloomberg survey. Smaller rival Bank of China posted an 11 percent increase to 27.9 billion yuan.
Shares of China’s five largest banks have rallied an average 39 percent since a 2 1/2-year low in October as concern that Europe’s debt crisis would lead to further economic slowdown in China eased. The Asian nation’s efforts to bolster banks’ risk buffers and curb inflation have pushed up funding costs, weakened the property market and triggered defaults.
“It’s inevitable for bad loans to rebound during an economic downturn, but the pessimism on Chinese banks seems to be overdone,” said Luo Yi, a Shenzhen-based analyst at China Merchants Securities Co., who has a buy rating on the sector. “Big banks have enough cushion for bad loans. Earnings in 2012 may beat estimates again as margins and loan growth won’t drop as much as people expected.”
China’s 3,800 banks had fourth-quarter net income of $35.4 billion, a third more than the total earnings of 7,357 U.S. lenders including Bank of America Corp. (BAC:US) and JPMorgan Chase & Co., data from the China Banking Regulatory Commission and the Federal Deposit Insurance Corp. showed.
Profit Gains Slow
The five largest banks in China, including ICBC and Bank of Communications Co., reported a 12 percent gain in total profit during the quarter, the slowest pace in two years, according to data compiled by Bloomberg. Their combined profit may increase about 19 percent this year, analysts’ estimates show.
ICBC rose 2 percent to HK$5.03 in Hong Kong as of 9:50 a.m., while Bank of China rose 1.6 percent to HK$3.13. The benchmark Hang Seng Index dropped 0.6 percent.
Chinese lenders advanced 7.47 trillion yuan of new loans last year, 6 percent less than the amount offered in 2010. The weighted average borrowing cost rose to 8.01 percent in December, up 1.82 percentage points from the beginning of the year, according to the central bank.
ICBC advanced 998 billion yuan of new loans in 2011, increasing the total by 15 percent to 7.79 trillion yuan. Non- performing loans rose to 73 billion yuan from 69.2 billion yuan at the end of September, according to its statement.
The lender said it expects to keep its bad-loan ratio to below 1.2 percent at the end of this year, compared with 0.94 percent in 2011.
Bank of China advanced 682 billion yuan of new loans in 2011, taking its outstanding amount to 6.3 trillion yuan. The lender’s non-performing loans, or those overdue for at least three months, rose to 63.3 billion yuan at the end of last year from 62.8 billion yuan in September.
“We are now cautious on the whole banking sector because the economic slowdown will affect everybody to some degree as weak loan demand hurts pricing power,” Rainy Yuan, a Shanghai- based analyst at Masterlink Securities Corp., said before ICBC and Bank of China’s earnings were announced.
China’s gross domestic product expanded 8.9 percent last quarter, the slowest pace in 2 1/2 years, as Europe’s debt crisis damped export demand and the property market weakened. Standard & Poor’s warned March 12 that a jump in bad loans may erode profitability at Chinese lenders.
Small Businesses Default
The economy may bottom out in the first half and the country has already passed through the tightest credit conditions in this cycle, Ba Shusong, a researcher at the Development Research Center of the State Council, said March 22.
Higher borrowing costs coupled with weaker export demand have fueled defaults at smaller businesses, causing bad loans at the banks to rise for the first time since September 2008.
At least 14,400 small and mid-sized enterprises went bankrupt in Zhejiang province, a hub for exporters, in the first half of last year, Hu Chengzhong, deputy head of the Zhejiang Federation of Industry & Commerce, said this month. About 15 percent of the region’s companies with annual sales of 20 million yuan were losing money, Hu said.
For 2011, ICBC earned 208.3 billion yuan, up 26 percent from the year earlier, fueled by rising loan demand and wider margins. Net income was almost double that of JPMorgan (JPM:US), the largest and most profitable U.S. bank last year.
ICBC’s capital adequacy ratio widened to 13.17 percent by the end of December, from 12.51 percent three months earlier. The ratio also expanded at Bank of China to 12.8 percent. The core capital adequacy ratio of both banks stood at 10.07 percent.
ICBC had outstanding loans to local government financing vehicles of 680 billion yuan at the end of 2011, Senior Executive Vice President Li Xiaopeng told reporters in Beijing yesterday. Of those credits, 0.73 percent were non-performing, President Yang Kaisheng said.
Loans to micro and small companies rose 46 percent last year and the bank targets a level above 1.1 trillion yuan by the end of 2015, Yang said.
Net interest income, or revenue from lending minus interest paid to depositors, rose 19 percent to 362.8 billion yuan in 2011 at ICBC, while fee income gained 39 percent to 101.6 billion yuan.
At Bank of China, the country’s fourth-largest lender, net interest income rose 18 percent in 2011 to 228 billion yuan as the lending margin widened to 2.12 percent. Non-interest income businesses such as trade finance and custodial services advanced 21 percent to 100.2 billion yuan in 2011. Its fourth-quarter profit beat analysts’ estimates by 9 percent.
To contact Bloomberg News staff for this story: Jun Luo in Shanghai at firstname.lastname@example.org
To contact the editor responsible for this story: Chitra Somayaji at email@example.com