Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, posted a 27 percent gain in third-quarter profit and agreed to acquire control of Axa SA’s local unit to add non-banking revenue.
Net income climbed to 42.6 billion yuan ($6.4 billion) from 33.6 billion yuan a year earlier, the Beijing-based company said in a statement yesterday. The lender will invest 1.2 billion yuan for a 60 percent stake in Axa’s insurance venture with China Minmetals Corp., President Yang Kaisheng said at a press conference in Beijing.
The profit growth, driven by a 14.7 percent increase in lending in the first nine months of 2010, may help cement ICBC’s position as the world’s most profitable bank for a third year. The lender is branching into insurance to reduce dependence on loans amid government efforts to curb credit growth and contain defaults after record lending in 2009.
"Chinese banks have been reporting sound earnings in the past two years and the trend may be sustained in the near future,” said May Yan, a Hong Kong-based analyst at Barclays Capital. Still, “the market is preoccupied with concerns of loan quality and overhang of regulatory requirements: that also explains why they need to look for other avenues of growth.”
Shares of ICBC have dropped 3 percent in Hong Kong this year, underperforming the 6 percent advance in the benchmark Hang Seng Index. The stock gained 0.7 percent to close at HK$6.24 yesterday, before the earnings announcement.
Banks’ Profits
ICBC’s quarterly profit was in line with the 42.8 billion yuan median estimate of nine analysts surveyed by Bloomberg.
Smaller rival Bank of Communications Ltd. yesterday posted a 24 percent gain in third-quarter profit to 9.18 billion yuan. That compared with the 9.5 billion yuan median estimate of seven analysts. Bank of China Ltd. and Agricultural Bank of China Ltd. on Oct. 27 reported almost 30 percent earnings growth, trumping estimates, as lending expanded 13 percent.
The banks’ profit growth may slow as the government and central bank take steps to curb accelerating inflation and prevent asset bubbles in the nation. China’s central bank raised interest rates last week and boosted reserve requirements at the biggest lenders two weeks ago after the economy grew 9.6 percent in the third quarter.
The banking regulator may also require the nation’s most important lenders to boost their capital adequacy ratio to as high as 15 percent by the end of 2012, and to maintain loan-loss reserves equivalent to at least 2.5 percent of total lending by then, a person with knowledge of the matter said last month.
'Default Risks’
"China banks will face greater pressure from policies on capital supplement, risk coverage, extraction of counter- cyclical capital and excess capital,” Nomura International Hong Kong Ltd. analysts led by Lucy Feng wrote in an Oct. 22 note. "Banks will have to cope with the greater potential default risks that can follow on from rapid loan growth.”
ICBC plans to provide distribution, sales network and risk management capabilities to the insurance venture, in which Paris-based Axa, Europe’s second-biggest insurer, will own a 27.5 percent stake and China Minmetals will hold 12.5 percent. The premium income for Axa-Minmetals, set up in 1999, rose 56 percent in the first eight months of the year.
The Chinese bank also plans to raise as much as 45 billion yuan from a rights offer in Shanghai and Hong Kong this year. The bank last month sold 25 billion yuan of convertible bonds, lifting its capital adequacy ratio to 11.57 percent as of Sept. 30 from 11.34 percent in June.
Fee Income
Net interest income, or revenue from lending minus interest payments on deposits, climbed 26 percent to 78.4 billion yuan in the third quarter as the profit margin on loans expanded, ICBC said. Net fee and commission income from products and services such as credit cards, wealth management and insurance sales rose 33 percent to 17.7 billion yuan.
ICBC set aside 8.24 billion yuan against potential soured debt in the past three months, compared with 4.41 billion yuan a year earlier. The lender’s bad loans declined to 75.7 billion yuan by September, accounting for 1.15 percent of total advances.
ICBC may earn $23.9 billion this year, compared with $16.5 billion at JPMorgan Chase & Co., according to the average estimate of analysts surveyed by Bloomberg.
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