BANK OF CHINA PROFIT GROWTH SLOWS TO 5.3% AS ECONOMY DECELERATES

Bank of China Ltd., the nation’s third-largest lender by assets, posted the slowest quarterly profit growth in three years as loan demand weakened and lower interest rates squeezed margins.

Net income climbed 5.3 percent to 34.8 billion yuan ($5.5 billion) in the three months ended June 30, from 33.1 billion yuan a year earlier, based on figures published by the Beijing- based lender yesterday. That was in line with the 34.3 billion- yuan average estimate of 17 analysts surveyed by Bloomberg.

The bank bolstered first-half earnings by setting aside fewer provisions for bad debt, as the first cut in benchmark interest rates since 2008 eroded profitability of lending operations. China’s biggest banks are trading at close to record-low valuations in Hong Kong on concern bad loans will increase as the economy slows.

“After two rate cuts, net interest margins will definitely narrow in the second half,” said Timothy Li, an analyst at Core Pacific-Yamaichi International Hong Kong Ltd. “That’s the utmost concern.”

Bank of China advanced 411 billion yuan of new loans in the first half, compared with 556 billion yuan during the same period last year. Non-performing loans, or those overdue for at least three months, rose to 63.6 billion yuan at the end of June from 63.3 billion yuan at the beginning of the year

So-called special-mention loans, or those at risk of going bad, fell 514 million yuan to 192 billion yuan.

Losing Streak

Soured debts at the nation’s 3,800 banks increased for a third straight quarter to 456.4 billion yuan by June, the China Banking Regulatory Commission said last week. The longest streak of deterioration in eight years highlights pressures on asset quality and profit growth.

Most of the increase in the industry’s bad loans came from the eastern Chinese province of Zhejiang, where bankruptcies among small businesses caused soured debt to increase by more than 50 percent in the first half, the Shanghai Securities News reported last week. Shanghai Pudong Development Bank (600000) Co. and Ping An Bank Co. this month both blamed the city of Wenzhou for piling up bad loans.

“We are a bit worried about the industry’s asset quality as bad loans may climb” if the economic slowdown deepens, Li said. “Loan growth is another concern.”

Industry Profits

China’s economy expanded 7.6 percent in the second quarter, the slowest pace in three years. Industrial companies’ profits fell 2.2 percent in the first half, compared with a 29 percent gain in the same period last year.

Bank of China earned 71.6 billion yuan in the first half, an increase of 7.6 percent from a year earlier, according to yesterday’s statement. BOC Hong Kong (Holdings) Ltd., the Bank of China unit that’s the sole yuan clearing bank for Hong Kong, said yesterday first-half net income fell 6.3 percent to HK$11.2 billion, beating the HK$10.2 billion average estimate of 10 analysts surveyed by Bloomberg News.

Net interest income at Bank of China rose 13 percent to 124 billion yuan in the first half, as the net interest margin narrowed to 2.1 percent. Income from fee-based services such as trade finance and custodial services dropped 2 percent to 34.3 billion yuan in the first half. The lender set aside 9.2 billion against bad assets, 25 percent less than a year earlier.

Bank of China’s capital adequacy ratio rose to 13 percent as of June 30 from 12.98 percent at the end of December. Its core capital adequacy ratio stood at 10.15 percent, according to yesterday’s statement.

‘Bumpy Road’

China Minsheng Banking Corp. (1988), the nation’s first privately owned lender, said yesterday first-half profit rose 37 percent from a year earlier to 19.1 billion yuan, beating analysts’ estimate of 18 billion yuan.

First-half profit growth at Chinese banks will be their “last solid results with a bumpy road ahead,” according to Deutsche Bank AG analysts led by Tracy Yu. They expect the nation’s 16 publicly traded lenders to post a 16 percent gain in net income in the first six months, followed by a 1.5 percent drop in the second half and then a sustained decline.

China’s manufacturing may be contracting at a faster pace this month, according to a preliminary reading of 47.8 for a purchasing managers’ index released yesterday by HSBC Holdings Plc and Markit Economics. That signaled more monetary and fiscal stimulus may be needed to secure a second-half rebound in economic growth.

“A few more cuts would help asset quality and also help loan demand,” said Alexander Lee, a Hong Kong-based analyst at DBS Vickers. “But it will hurt margins if there are more interest rate cuts.”

Estimate Cuts

Standard Chartered Plc analysts Lawrence Chen and Hans Fan expect forecasters to cut their estimates for the industry after first-half results, prompted by a margin squeeze, according to a note on Aug. 9.

China’s central bank in June allowed banks to charge less for loans as it liberalizes rules on how lenders set interest rates. After widening the discount on borrowing costs to 20 percent below the benchmark rate that month, it increased the gap to 30 percent in July.

The weighted average lending rate charged by banks fell to 7.06 percent in June, down by 0.56 percentage point from three months earlier, according to the central bank. About 8 percent of loans were priced below the benchmark rate in June, the most in 11 months.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net