China’s five largest banks are set to report record profits for at least the fourth year as credit demand bolstered by economic growth fueled an average 29 percent growth in earnings.
Bank of China Ltd. (3988), the nation’s third-largest lender by market value, may say today that 2010 net income climbed 22 percent to 99 billion yuan ($15 billion), according to the average of 19 estimates compiled by Bloomberg. China Construction Bank Corp. (939), the second-largest, is expected to report a 30 percent advance in full-year profit this week.
Rising earnings may ease investors’ concerns that bad loans may climb as China steps up measures to contain inflation and cracks down on loans to local governments. Lending margins for the five biggest banks, which control more than half of the nation’s $7.5 trillion loan market, are increasing after the central bank began raising interest rates in October.
“Investors can for the first time since 2009 really focus on the earnings quality of Chinese banks, instead of macroeconomic conditions, and value them accordingly,” Victor Wang, a Hong Kong-based analyst at Macquarie Capital Securities Ltd., said by telephone. “We’re looking for more clarity on margins, asset quality, and regulatory policies going forward.”
Net interest margins, a measure of loan profitability, at the five largest banks may have averaged 2.38 percent in 2010, up from 2.25 percent in 2009, according to estimate of five analysts surveyed by Bloomberg News.
Stock Performance
Shares of Industrial & Commercial Bank of China (601398) Ltd., Construction Bank, Bank of China, Agricultural Bank of China Ltd. (1288) and Bank of Communications Co. have outperformed Hong Kong’s benchmark Hang Seng Index (HSI), which has declined about 1 percent this year.
ICBC, based in Beijing, is likely to cement its position as the world’s most profitable lender on March 30, when it may report that 2010 net income climbed 27 percent to 163.7 billion yuan, according to a Bloomberg survey.
Agricultural Bank of China may post a 40 percent gain in profit and Bank of Communications is expected to report a 26 percent increase when they announce earnings next week.
Based on current exchange rates, ICBC’s profit is 43 percent more than that of JPMorgan Chase & Co. (JPM), the most profitable bank outside China.
The Asian nation, which last year overtook Japan to become the world’s second-largest economy, may grow 8 percent annually for the next two decades to become twice the size of the U.S., World Bank Chief Economist
Justin Lin said yesterday.
The People’s Bank of China has raised interest rates three times since October and pushed the ratio of deposits the largest banks must set aside as reserves to 20 percent, the highest in at least two decades.
Borrowing Costs
Lending rates on more than 40 percent of China’s bank loans were above the benchmark rate in December, 6 percentage points more than a year earlier, according to the central bank.
China’s Hong Kong-listed lenders, which include the five biggest, may boost 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 Sanford C. Bernstein & Co. analyst Mike Werner. A basis point is 0.01 percentage points.
“Margin expansion will be more than enough to make up for slower credit growth this year,” said Sophie Jiang, a Beijing- based analyst at CCB International Securities Ltd. She expects profit to climb at least 20 percent for the big banks in 2011.
Credit Slowdown
Loan growth will slow this year after the government adopted a new system that will penalize banks with excessive lending by requiring them to lodge additional reserves with the central bank, ICBC President Yang Kaisheng, Construction Bank Chairman Guo Shuqing and Bank of China Chairman Xiao Gang said this month.
The tightened monetary policy is helping slow lending. Domestic banks offered 1.58 trillion yuan of new loans in the first two months of this year, 25 percent less than the same period a year earlier, according to the central bank.
An unprecedented $2.7 trillion of loans extended by domestic banks in the past two years has fueled inflation to near a two-year high and raised concerns about loan defaults. China faces a 60 percent risk of a banking crisis by mid-2013 if a property bubble bursts, Fitch Ratings said earlier this month, citing a macro-prudential monitor it tracks.
China’s banking regulator has required lenders to limit credit to the real estate industry, assign higher risk- weightings for loans to local governments’ financing vehicles, and move off-balance sheet assets back onto their books.
