HONG KONG - China's banks, making the most of a fast-growing economy and
relative freedom from the afflictions undermining Citigroup and other Western
counterparts, have girded themselves against the risk of a domestic and global
slowdown with first-half profit growth of as much as 150%.
Lower tax rates and high interest margins also helped drive growth at banks
such as Industrial & Commercial Bank of China (ICBC), the country's biggest
listed lender by assets and now the world's most profitable lender.
ICBC's net profit rose 57.25% to 64.53 billion yuan (US$9.4 billion) in the
first half, overtaking the US$7.7 billion earned in the
period by London-based HSBC. That was not enough for the Chinese lender to
escape being outpaced by its nearest domestic competitor, China Construction
Bank, where first-half net profit gained 71.4% from a year earlier to 58.67
billion yuan.
Smaller banks also reporting over the past few days came in with even faster
growth. Net income at China Merchants Bank, the country's sixth-largest by
assets, jumped 116% to 13.2 billion yuan, while US-based Citigroup could take
some satisfaction from the 150% gain at partly owned Shanghai Pudong
Development Bank, which reported profit of 6.37 billion yuan.
Citigroup, the biggest US bank by assets, HSBC and other Western lenders are
reporting lower earnings under the impact of more than US$500 billion of
writedowns related to the US subprime crisis and slowing local economies.
Overseas banks such as ICBC are exposed to the crisis-hit US housing market
through owning bonds or shares in firms such as mortgage guarantors Fannie Mae
and Freddie Mac, previously considered safe long-term bets but now declining in
value as doubts grow on their ability to pay debt. Shares of the two firms,
which underwrite a majority of US home mortgages, have fallen more than 90%
this year.
ICBC held bonds related to Fannie Mae and Freddie Mac totaling US$2.7 billion,
or about 0.15% of its 9.4 trillion yuan of total assets, chairman Jiang
Jianqing said.
"The bonds are a small proportion of our assets. We have always been cautious
in overseas investment," Jiang said following the bank's earnings announcement
last week.
China Citic Bank, seventh-largest bank in the country, which reported a 162%
jump in net profit to 8.42 billion yuan, had a similarly small exposure to
Fannie and Freddie. The banking unit of Beijing's CITIC Group said it had $403
million of corporate bonds issued by the two firms at the end of June,
accounting for 0.64% of its total investment portfolio. It also held $1.18
billion of home mortgages secured by Fannie Mae and Freddie Mac,
Lower corporate income-tax rate, cut to 25% from 33% from early this year,
helped lift ICBC's earnings, chairman Jiang said. The bank, like its rivals,
also increased profitability, as measured by net interest margin (NIM), as it
stepped up loans and took in more deposits.
The lender's NIM widened to 3.01% from 2.8% at end of last year while
outstanding loans gained 6.9% to 4.36 trillion yuan in the six months to the
end of June and deposits rose 9% to 7.54 trillion yuan. First-half net interest
income rose 28.8% from a year earlier to 131.79 billion yuan, while its net fee
and commission income surged 48% to 24.48 billion yuan.
Shanghai Pudong Development Bank said its NIM widened to 3.66% from 3.11% at
the end of last year, as net interest income grew 64%.
Citic Bank attributed its growth profit jump to six increases in the benchmark
interest rate by the central People's Bank of China's last year, the
accumulated impact of which is only fully realized this year.
The country's banks are taking in more deposits as earnings rise in the world's
fastest-growing major economy and lending more as companies invest to meet
overseas and domestic demand. Even so, the still 10%-plus growth has slowed for
four straight quarters under the pressure of rate increases and other cooling
measures as the government strives to rein in inflation.
Bankers and analysts said banks' growth was expected to slow in this half, with
profitability coming under pressure as the government halts or reverses its
policy of increasing interest rates. There have been no interest rate hikes so
far this year.
China Merchants Bank said in its earnings statement last week that its NIM will
also decline in the second half amid a shift of capital from the stock market
to fixed deposits and uncertain rate policies.
China's retail stock investors are increasingly reluctant to invest in a market
that is one of the world's worst performers this year. Haitong Securities
analyst Qiu Zhicheng said there is uncertainty over banks funding costs that
might rise as people shift savings to longer-term deposits in reaction to the
stock market downturn. The benchmark Shanghai Composite Index has declined more
than 50% since December.
"If the market remains gloomy, there will be more capital inflow to fixed
deposits, and the issuance of a 3-billion-yuan bond will lift capital costs,"
Merchants Bank chief financial officer Li Hao said. The bank this month said it
would issue a 3-billion-yuan bond, with half of that for operating capital and
the rest for returning a bank loan.
Merchants Bank chairman Qin Xiao said the bank will compensate for declining
NIM and slowing loan growth by diversifying into non-fee income business and
through increased lending to small and medium-sized businesses.
Merchants Bank's NIM would decline and its non-performing loan ratio would pick
up on a half-on-half basis for the second half of 2008, Sandra Cai said in a
research note for Daiwa Institute of Research. "We believe the upside potential
for the loan yield is limited, but think the funding-cost pressure will
increase in the second half of the year due to time-deposit migration. We
remain cautious about the asset quality of loans to small enterprises,
credit-card loans and mortgages."
Like Merchants Bank, China Construction Bank aims to expand services to small
businesses.
"In the first half, we closely monitored the macroeconomic situation changes,
streamlined our business structure and achieved good results," the
Beijing-based China Construction Bank said in a statement to Hong Kong's stock
exchange. "For the second half, we will continue expanding services to small
enterprises, ensure the healthy development of fee and commission business and
control credit risks."
The bank boosted first-half revenue 36% from a year earlier to 135.74 billion
yuan, with net interest income up 24.51% to 111.08 billion yuan. Fee and
commission income surged 59.3% to 20.17 billion yuan.
China Citic Bank's chief executive officer Chen Xiaoxian said the profitability
margin would come under pressure if the market continued to weaken.
"We do not expect the deposit growth to remain at the same level as the first
six months," Chen said. "The increasing volatility in the financial market,
competition and uncertainties in the country's monetary tightening policies
will bring more challenges."
Even so, the government earlier this summer indicated that it would return to a
pro-growth macroeconomic policy after its series of interest rate cuts took the
sting out of inflation - down to 6.3% in July from as much as 8.7% in February
- and as slowing global growth cuts demand for the country's exports. The
Economic Observer this week said officials are working on a 370 billion yuan
fiscal stimulus package.
Measures to support growth could include tax rebates for exporters, an easing
of lending quotas, slower yuan appreciation or even depreciation, Bloomberg
reported last week, citing Glenn Maguire, chief Asia-Pacific economist at
Societe Generale in Hong Kong.
Some banks are also planning aggressive expansion. ICBC said on Friday it would
borrow as much as 100 billion yuan to fund overseas acquisitions.
ICBC shares, which have dropped by 3.4% this year, have gained 5.1% since the
August 21close of trade, before the bank announced its results. China
Construction Bank, down 4.3% this year, has recovered 4.3% since releasing its
earnings Friday.
Shares of Merchants Bank and Citic Bank, both down more than 16% this year,
have added 8.21% and 2.6% since their earnings announcements last week.
Olivia Chung is a senior Asia Times Online reporter.
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