UPDATE 2-Bank of China Q4 profits rise at the cost of lower provisions
* Q4 net profit up 11 pct yr-yr on lower provisions, tight cost controls
* Q4 Bad loans levels stay flat from previous quarter
* 2013 profit up 12.5 percent year-yr to 156.9 bln yuan
* BoC's lower provisions contrasts with AgBank's higher provisions strategy (Adds video link, details on provisions)
SHANGHAI, March 26 (Reuters) - Bank of China (BoC) posted on Wednesday an 11 percent increase in fourth-quarter net profits, beating estimates, as China's fourth-largest lender shrugged off concerns about rising bad loans and cut provisions.
A slowing economy and the debt overhang from the massive credit-fuelled stimulus that policymakers launched in response to the 2008 financial crisis are stoking concern about an increase in loan defaults in China.
In a sign of confidence in its asset book, BoC's bad loan provisions dropped 15.7 percent year-on-year in the fourth-quarter, compared to a 2.8 percent year-on-year increase in the previous quarter.
This decline helped boost net profits to 36.7 billion yuan ($5.9 billion) in the same period from 33.1 billion yuan in the same 2012 period, according to Reuters calculations based on full-year profit. For 2013, BoC's net profit rose 12.5 percent to 156.9 billion yuan from 139.4 billion yuan a year earlier.
The lower provisions contrast with second-largest lender, the Agricultural Bank of China , which on Tuesday posted its slowest profit growth in 2013 since it became listed due to higher bad loan hedging.
"The Bank set clear priorities in a bid to comprehensively tighten risk control, paying particular attention to key fields including overcapacity industries, local government financial vehicles and real estate," BoC President Chen Siqing in the earnings statement.
BoC's non-performing loan ratio was flat at 0.96 percent at end-December compared to end-September. The share of special mention loans, which measure loans not yet classified as non-performing but under pressure, fell by half a percentage point.
The bank's loan-loss coverage ratio - which measures the ratio of provisions to total loans - dipped to 2.21 percent at end-December from 2.23 percent at end-June.
That suggests the decision to reduce provisions caused it to sacrifice some degree of prudence in favor of reporting stronger headline growth.
BoC, however, appears well positioned to absorb losses if bad loans rise, as its tier-one capital ratio rose strongly to 9.70 percent from 9.52 percent at the end of the third quarter.
Cost control was another source of strength for the bank. Operating expenses rose by only 7.9 percent for the full year, down from a gain of 11.6 percent through the first six months.
Net interest income increased by 10.4 percent in 2013, while gains in net fees and commissions rose 17.4 percent.
The bank's net interest margin was 2.24 percent at the end of the fourth quarter, from 2.22 percent at the end of the previous quarter. Analysts say tighter credit conditions in the fourth quarter supported bank margins by increasing their bargaining power to demand higher interest rates from borrowers.
BoC is the second of China's big four banks to report its earnings so far. Its Hong Kong shares closed 2.5 percent ahead of the results announcement.
($1 = 6.2024 Chinese Yuan) (Reporting by Shanghai Newsroom and Gabriel Wildau and Twinnie Siu in HONG KONG; Writing by Lawrence White; Editing by Miral Fahmy)