China's largest banks posted stronger-than-expected first-quarter earnings, but the size of their buffer against a potential spike in bad loans was revised downward after the regulator pushed them to account more conservatively for loans they made during a two-year lending binge.
Industrial & Commercial Bank of China Ltd.'s capital-adequacy ratio—the amount of capital that banks hold against the perceived risk of their assets— saw the biggest drop, falling 0.5 percentage point, and wiping out much of the bump it got from the almost 70 billion yuan ($10.8 billion) worth of capital it raised from a convertible-bond sale and rights issue last year.
China's banks sold tens of billions of dollars worth of equity and debt last year in an effort to restore their capital levels, after making 18 trillion yuan in new loans over 2009 and 2010.
A large chunk of that lending—the mainstay of the government's stimulus—went to local government-backed companies that were set up to fund infrastructure projects. But given that infrastructure projects typically don't generate revenue for years if at all, Beijing has started to worry about the scope for local governments to make good on the debt.
The banking regulator has since pushed banks to hold more capital against these loans based on the extent to which the projects' cash flows or collateral from the local government covers them.
This is a "one-off impact as Chinese banks adjusted the risk weighting of [local government financing-vehicle loans]," said Lucy Feng, a Hong Kong-based Nomura banking analyst. "But this has [now] been fully reflected in" the first-quarter disclosures.
ICBC's capital-adequacy ratio stood at 11.77% at the end of March, down from 12.27% at the end of last year and only a shade above the minimum 11.5% mandated by the banking regulator. It was at 11.57% at the end of the third quarter before the bank embarked on its rights issue and bond sale.
Agricultural Bank of China Ltd. said its capital-adequacy ratio fell to 11.40% from 11.59% at the end of last year. AgBank has plans to raise its capital level by selling 30 billion yuan worth of subordinated bonds in the near future, despite raking in $22.1 billion last year from its initial public offering.
Still, analysts said the latest results don't show signs of the banks' loan quality deteriorating, although government tightening moves in the housing market and government-led infrastructure development will eventually reverse the past decade's trend of improving loan performance.
Meanwhile, bank profits continued to grow strongly, although at a slower pace than last year, suggesting Beijing's moves to cool the economy are having an impact.
ICBC, China's largest bank by assets, said its net profit for the three months ended March 31 rose 29% from a year earlier to 53.79 billion yuan, higher than the average forecast of 51.69 billion yuan by five analysts.
At Bank of China Ltd., the country's third-largest bank, net income rose 28% to 33.44 billion yuan, above the 31.32 billion yuan forecast by analysts.
Net profit at China Construction Bank Corp., the second largest of China's banks, rose 34% to 47.19 billion yuan in the first quarter.
However, ICBC's first-quarter earnings gain lagged behind its 32% net-profit rise during the fourth quarter, and Bank of China's growth slowed from 34%.
On Wednesday, AgBank, China's fourth-largest bank, also reported forecast-beating earnings gains. But its 36% rise in first-quarter earnings was lower than its fourth-quarter growth of 83%.
China Construction Bank was the exception; its profit growth in the first quarter was faster than the 18% rise in the previous quarter.
"I expect the profit growth of the whole banking sector to slow this year, as the government's monetary tightening reduces the supply of credit," said Li Shanshan, a banking analyst at Bocom International in Beijing.
Beijing has repeatedly raised interest rates and the banks' reserve requirement ratio in recent months in an effort to rein in inflation, which in March rose 5.4% from a year earlier, its fastest rate in almost three years. While banks can charge more for their loans given the tighter credit conditions, the sharp reduction in lending growth has curbed profit growth, analysts said.
