August 30, 2012 / 11:36 AM / 7 years ago

ICBC Q2 sees weakest profit growth since financial crisis

HONG KONG/SHANGHAI (Reuters) - Industrial and Commercial Bank of China (1398.HK), the world’s biggest lender by market value, posted on Thursday its smallest earnings growth since the global financial crisis, in the clearest sign yet that a slowing Chinese economy has put an end to the days of easy bank profits.

Pressure on Chinese banks’ huge profits is set to grow as the full impact of Beijing’s recent moves to liberalize interest rates leads to increased competition for deposits and as a crackdown by the bank regulator on fees charged by banks weighs.

Faced with its slowest full year of economic growth since 1999, China has cut the amount of cash banks must hold as reserves and lowered interest rates twice in the space of one month. It has given banks more leeway to determine what depositors are paid and what rates to charge borrowers, stoking competition.

ICBC made 61.82 billion yuan ($9.73 billion) net profit in the April-June period, according to calculations from half-year results released by the company. That was higher than the 55.69 billion yuan it recorded a year ago, and matched expectations for 60.98 billion yuan, based on a Reuters survey of nine analysts. But the 11 percent profit growth in the quarter was less than half the 29 percent rise it posted a year ago.

“The economy is slowing, so everything will slow down with it,” said Sheng Nan, an analyst at CCB International in Hong Kong.

Bank of Communications (3328.HK), the country’s No.5 lender, also recorded on Thursday its slowest first-half growth in three years.

Hong Kong-listed shares of ICBC, which has a market value of about $206 billion, closed down 1.9 percent on Thursday ahead of the results. They are down about 9 percent so far this year.

Since going from insolvent to publicly traded banks in the past seven years, China’s so-called ‘Big Four’ banks have grown to be among the world’s largest by market capitalization, assets and profits.

ICBC’s quarterly profit almost equals the $10 billion in combined second-quarter earnings from Bank of America (BAC.N), JP Morgan (JPM.N) and Citigroup (C.N).

Growth in fee and commission income, which drove much of ICBC’s earnings in the past two years, slowed to 3.5 percent in January-June. This is a slowdown from the growth of 40 percent the bank recorded in 2011.

The China Banking Regulatory Commission clamped down on the type of fees lenders can charge in April this year, after the country’s Premier Wen Jiabao said its banks made profits too easily. Previously, banks could charge for services that are free in most other markets such as changing an Internet banking password or an ATM pin-code.


ICBC said its non-performing loan ratio stood at 0.89 percent at the end of June, lower than the 0.95 percent it recorded at the end of March. Fears have been rising that loans doled out during the 2008-09 financial crisis could sour in large numbers as China’s economy slows.

China’s banks, especially the major lenders, regularly report non-performing loan ratios that are lower than banks of developing and developed Asian economies. That reporting pattern has sparked concern among bank analysts that China’s Big Four don’t disclose the full scope of delinquent loans.

As an indicator of potential bad debts, ICBC’s overdue loans, which are loans with missed payments, rose 7 percent to 62 billion yuan from the end of 2011. Other banks have also seen a similar rise, with Bank of China’s (3988.HK) overdue loans rising 18 percent.

Some fund managers expect non-performing loan ratios in China to rise to about 3-5 percent, a figure that would put the ratio in line with the Indian banking system.


ICBC’s net interest margin ticked up 5 basis points to 2.66 percent from 2.61 percent at the end of 2011, helped by its ability to charge more for loans than smaller rivals. Bank of China and China Construction Bank (0939.HK) also reported better-than-expected margins.

“The good thing is that ICBC’s interest margins surprised on the upside, which helped boost earnings,” said CCBI’s Sheng.

It’s a different story for China’s smaller lenders such as China Minsheng Bank (1988.HK), which saw its net interest margin fall 25 basis points to 3.13 percent in April-June, according to BOC International analyst Sun Peng.

China has a 75 percent loan-to-deposit limit that its regulators have placed on banks — in other words, lenders are allowed to extend loans of up to three-quarters of their deposit base.

Most small to mid-sized banks have already hit the limit, according to central bank figures. By contrast, the big banks all have LDRs in the 60s. This gives the bigger players more bargaining power when setting loan pricing, said Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Investment Partners.

“Liquidity will be a big challenge, especially for the smaller banks,” Kwong said before ICBC reported its earnings. “They will have to slow down loan growth, which will impact future earnings.” ($1 = 6.3517 Chinese yuan)

Additional reporting by Lawrence White; Editing by Michael Flaherty and Muralikumar Anantharaman

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