China Banks See Less Growth After Doubling Profits (Update1)

By Luo Jun and Chia-Peck Wong

Sept. 1 (Bloomberg) -- Industrial & Commercial Bank of China Ltd., the world's most profitable lender, and Chinese competitors predict slowing growth after posting the fastest earnings growth among the world's banks in the first half.

China's 14 publicly traded banks doubled profit on average in the six months to June 30, according to data compiled by Bloomberg. They mostly avoided the more than $500 billion of writedowns and credit losses that pushed global financial companies including Citigroup Inc. and UBS AG to post losses, fire workers and raise capital.

Bank of China Ltd., the nation's third-largest and the last to report earnings, on Aug. 28 became the latest to say loan growth will taper off as China's economy weakens. Gross domestic product rose 10.1 percent in the second quarter, the slowest pace since 2005, as exports cooled.

``2008 is a special year where profit growth is really high,'' said Alexander Lee, a Hong Kong-based analyst at CIMB-GK Research. ``2009 will inevitably slow down a lot compared with 2008 levels.'' Lee expects profit increases in the ``low teens'' next year.

Li Lihui, Bank of China's president, on Aug. 28 said lending growth will slow in the second half from the 13.8 percent pace of the first six months. ``Economic uncertainties'' and potential spillover from the global financial crisis spawned by the U.S. housing recession pose challenges for management, he said.

Better Than Others

Manufacturing in China contracted for a second month in August, the China Federation of Logistics and Purchasing said today.

Bank shares have dropped an average 48 percent this year before today on China's stock exchanges, dragged down by the collapse of the nation's equity-market bubble. Still, Beijing- based ICBC kept its position as the world's largest by market value and this month added the title of most profitable after generating $9.42 billion of net income in the first half.

``No one is expecting them to produce another 100 percent growth,'' said Khiem Do, who helps oversee about $11 billion of Asian equities at Baring Asset Management (Asia) Ltd. ``The bank investor has to decide whether the Western banks have bottomed out and are going to show a strong rebound in results. If there is still a problem, one might as well stay with the Chinese banks.''

One threat to Chinese banks' earnings comes from potentially thinner loan margins. The stocks slump has prompted a shift from lower-yielding demand deposits that clients can draw on at any time to fixed-term accounts that pay higher rates. At Bank of Communications Ltd., demand deposits accounted for 49 percent of the total as of June 30, down 10 percentage points from six months earlier.

The shift will narrow the spread between lending and deposit rates, weighing on loan profitability, according to Credit Suisse Group.

Loan Quota Filling

China Construction Bank Corp., the country's second-biggest, said this week it wouldn't be able to repeat the 71 percent jump in first-half profit, the largest since 2006.

Bank of Communications Chairman Jiang Chaoliang said Aug. 26 that earnings growth probably peaked in the first half, identifying slowing loan growth and margin contraction as challenges.

Banks extended 2.45 trillion yuan of new loans in the first half, representing two-thirds of the full-year quota allowed by the central bank. Listed banks' loan-to-deposit ratio averaged 68 percent as of June 30, up from 66 percent at the end of last year. Chinese regulations cap the ratio at 75 percent.

An additional challenge comes from rising bad loans should China's economy slow sharply, said fund manager Shao Zeyang. The government spent about $500 billion bailing out banks in the past decade after years of lax lending standards and fraud caused delinquent loans to balloon.

``Margin contraction and asset quality are still the two major concerns,' said Shao, who helps oversee 6.8 billion yuan at Fortune SGAM Fund Management Co. in Shanghai. ``Chinese banks don't have an impressive track record in managing risks during an economic downturn.''

To contact the reporters on this story: Luo Jun in Shanghai at at jluo6@bloomberg.net; Chia-Peck Wong in Hong Kong at cpwong@bloomberg.net

Last Updated: September 1, 2008 01:29 EDT

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