March 26, 2012 / 3:56 AM / 7 years ago

Slowing China growth hits CCB earnings, shares down

HONG KONG (Reuters) - China Construction Bank (0939.HK), the world’s No.2 lender, reported worsening credit quality and lower fee income in the fourth quarter as China’s move to steer its economy towards a soft landing squeezed the financial services industry.

CCB (601939.SS), which is valued at $193 billion, said total non-performing loans (NPLs) rose almost 10 percent in the quarter, hit mainly by a deterioration in the manufacturing, real estate and retail sectors.

“They are trying to manage the quality of their loans very tightly, but NPLs is an issue the market is very concerned about and any tick upwards will not be good,” said Patrick Pong, an analyst at Mirae Asset Management in Hong Kong.

“If the economy slows down, credit quality will naturally worsen,” he said.

The weak numbers pushed CCB's Hong Kong-listed shares down some 0.5 percent in morning trade, underperforming a small gain in the Hang Seng Index .HSI.

CCB, which counts Singapore state investor Temasek TEM.UL as a stakeholder, posted a 23 percent rise in October-December net profit to 30.25 billion yuan ($4.8 billion), according to Reuters calculations from full-year numbers. Full-year profit rose 25 percent to 169.3 billion yuan, just shy of a mean estimate for 170 billion yuan from 25 analysts surveyed by Thomson Reuters I/B/E/S.

CCB said loans classified as “substandard” also spiked 27 percent in the second half of the year. The rise in non-performing loans forced the bank to set aside more money in loan-loss provisions, which rose 20 percent against total loan growth of 14.5 percent.

The higher bad loan costs highlight growing concern that non-performing loans are likely to increase as growth in the economy slows. Premier Wen Jiabao this month forecast sub-8 percent GDP growth for the first time in eight years.

Fee income, which has been driving much of the bank’s profit growth in the past few years, also fell, declining 14 percent in the fourth quarter to 18.2 billion yuan.

“As loan pricing weakens and the Chinese regulators target off-balance sheet activities and control fee income, momentum in fee income may further slow down going forward,” said May Yan, an analyst at Barclays Capital in Hong Kong.

CCB said yuan-denominated loans were expected to grow by about 12 percent this year, CCB said, slower than last year’s 14 percent increase.

“In 2012, the global economic environment is expected to become more severe and China’s economic development faces numerous challenges,” the bank said in a statement late on Sunday.

“With the influence of weak global economic recovery and domestic economic restructuring, China’s economic growth momentum will slow.”

This month, the four big state-backed banks said they would lend more to qualified property developers to boost entry level housing supply, a signal they are ready to ratchet up property lending. For two years, China has restricted bank lending to the real estate sector to curb speculation in high-end housing that saw prices in key cities double in 18 months to end-2010.

The four banks - Industrial and Commercial Bank of China (601398.SS) (1398.HK), CCB, Bank of China (601288.SS) and Bank of China (601988.SS) (3988.HK) - which account for about 40 percent of total loans in China, will accelerate loan approvals for both developers and first-time home buyers, possibly by charging first-time buyers lower rates.

China’s housing market is vital for the health of the broad economy as real estate investment presents about 13 percent of China’s GDP and drives demand in about 40 different industries.

Third-ranked AgBank last week reported a drop in fourth-quarter net profit on rising bad loan costs and slowing credit growth. AgBank shares fell by the most in 6 weeks the day after its earnings.

Part of CCB’s profit growth can be attributed to a lower dividend payout ratio, allowing the bank to keep more of its earnings. China’s Central Huijin Investment, state parent of the country’s top four lenders, cut that ratio last month for CCB, ICBC and Bank of China.

Mirae Asset Management estimates 2011’s dividend payout ratio at about 34 percent, lower than the 39 percent the bank paid out in 2010.

Shares in the country's big four state-owned banks, collectively worth some $700 billion, have fallen 6-12 percent this month, underperforming the broader Hang Seng .HSI benchmark's 4.7 percent decline.

Reporting by Kelvin Soh; Editing by Richard Pullin

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