UPDATE 1-China's AgBank Q2 profit beats estimates; warns of 'challenges' ahead
(Recasts with quarterly result, adds details, background)
* Q2 net profit 45.3 bln yuan vs forecast 42.34 bln yuan
* NPL ratio down at 1.25 pct from 1.27 pct in Q1
* Shares down 12 pct this year, lagging broader market
By Lawrence White and Gabriel Wildau
HONG KONG/SHANGHAI, Aug 28 (Reuters) - Agricultural Bank of China Ltd , the country's No. 3 lender, beat expectations with a 22 percent rise in second-quarter profit, buoyed by higher fee income, but warned of major changes and challenges ahead for China's banking industry.
AgBank's net profit rose to 45.3 billion yuan ($7.4 billion) in the April-June period, according to Reuters calculations based on the bank's first-half figures, above analysts' expectations of 42.3 billion yuan. The rise in profit was faster than the 8.2 percent year-on-year growth it recorded in the first quarter.
"We are well aware that the internal and external environment of the banking industry in China is undergoing dramatic changes which may bring arduous challenges to our operation and management," bank Chairman Jiang Chaoliang said in a statement.
The China Banking Association said last month it expects net profit growth for China's 17 listed banks to slow to 8 percent in 2013 from 19 percent in 2012.
While such growth is still strong by global standards, analysts are concerned about a rise in bad loans at China's banks in the second half of this year because reduced lending by banks and the slowing economy are pressuring borrowers.
AgBank set aside 10.0 billion yuan in loan-loss provisions in the second quarter, equal to 8.6 percent of its operating income, down from 10.3 percent in the first quarter.
Pang Xiusheng, vice president at AgBank's rival China Construction Bank Corp, said at a news conference on Monday that CCB expects a rise in bad loans in the second half of the year.
CCB's second-quarter net profit rose 9.7 percent, beating analysts' estimates but slowing sharply from recent quarters. Industrial and Commercial Bank of China and Bank of China are due to report earnings on Thursday.
While AgBank's non-performing loan ratio fell to 1.25 percent in the first half from 1.27 percent at the end of March, overdue loans not designated as NPLs rose to 94.5 billion yuan as of end-June from 87.9 billion at the end of December.
AgBank, founded by Mao Zedong in 1951 to fund rural causes, was the last of China's "Big Four" lenders to go public, as Beijing pumped cash into the bank to clean up decades of policy-led lending.
While the bank's dominance in rural China secures it a flood of cheap deposit funding, it suffers from the weakest asset quality and highest credit costs among its peers, according to Morningstar analyst Iris Tan.
As with other Chinese lenders, AgBank has also faced declining net interest margins, as China has loosened the cap on interest rates that banks can offer to depositors, unleashing more competition and chipping away the spread between what the bank pays depositors and charges borrowers.
China's banks are expected to win approval for the issuance of tens of billions of yuan in negotiable certificates of deposit, Reuters reported exclusively last week, in a move that would constitute another step towards liberalising China's domestic interest rates.
AgBank's net interest margin for the first half of the year fell to 2.74 percent, AgBank said, down from 2.78 percent at the end of March. Growth in net interest income, the biggest source of revenue for Chinese banks, slowed to 6.0 percent year-on-year in the second quarter from 9.1 percent in the first quarter.
AgBank's shares have fallen about 12 percent this year, compared with a 3.5 percent drop in the benchmark Hang Seng Index. ($1 = 6.1217 Chinese yuan) (Editing by Chris Gallagher)
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