HONG KONG—Bank of Communications /zigman2/quotes/203442771/delayed HK:3328 0.00% Co. posted a 30% rise in first-half net profit on wider lending margins and higher interest and fee income, but the results were eclipsed by smaller rival China Merchants Bank /zigman2/quotes/209899244/delayed HK:3968 +1.54% Co., whose first-half earnings jumped 60%.
The results from BoCom, China's fifth largest bank by assets, and China Merchants Bank, the country's sixth, bode well for other state-run lenders' earnings. Still, analysts say concerns about the health of China's banks remain following last year's lending binge and increased evidence of a slowdown in the domestic economy.
BoCom, which is 19%-owned by HSBC Holdings PLC, said net profit for the six months ended June 30 rose to 20.36 billion yuan ($3 billion) from 15.65 billion yuan a year earlier, in line with the average 20.77 billion yuan forecast of five analysts.
Net interest income rose 34% to 39.9 billion yuan from 29.79 billion yuan, as a slightly tight credit environment in the first half improved banks' ability to price loans and borrowing demand remained strong. Net interest margin rose to 2.43% from 2.30% at the end of last year.
Strong credit-card and wealth-management product sales also helped BoCom's net fee and commission income rise 30% to 7.13 billion yuan from 5.48 billion yuan.
China Merchants Bank's net jumped to 13.2 billion yuan from 8.26 billion yuan, slightly higher than the average 12.89 billion yuan forecast of six analysts. Net interest income rose 41% to 26.34 billion yuan, as net interest margin rose sharply to 2.56% from 2.23% at the end of 2009. China's midsize banks can charge small and midsize companies, which comprise their client base, higher interest rates on loans than the country's big banks charge their customers.
The robust first-half performance comes as analysts are lowering their full-year earnings forecasts for China's banks because of a decreasing likelihood of interest-rate increases amid a cooling domestic economy and rising credit provisioning. The increased provisioning owes to government efforts to curb surging property prices as well as increased regulatory scrutiny of local governments' ability to repay loans.
China's recent order to banks to move loans they had sold to trust companies back onto their balance sheets also will crimp their fee income. Banks had transferred loans to trust firms to be repackaged as wealth-management products as a way of circumventing lending quotas.
Last week, UBS lowered its earnings forecasts for China's three big banks—Industrial & Commercial Bank of China /zigman2/quotes/201401473/delayed HK:1398 +0.24% Ltd. , China Construction Bank /zigman2/quotes/208974133/delayed HK:939 +0.38% Corp. and Bank of China /zigman2/quotes/204682472/delayed HK:3988 +0.40% Ltd.—by an average 5% for 2010 and 11% for 2011. J.P. Morgan Chase cut its earnings forecasts for China's banking sector by 3% to 4% in 2011.
Despite market concerns about a rise in banks' bad assets, BoCom said its nonperforming loan ratio fell to 1.22% at the end of June from 1.36% at the end of last year. It said it raised its provision coverage ratio to 161.17% of bad loans from 151.05% in the same period, reflecting caution about the asset quality trend.
Qian Wenhui , BoCom's vice president, said at a news conference that the lender recently conducted a stress test on its loans to homeowners and property developers, assuming home prices will fall 30% to 50%.
"Even based on the worst scenario [when property prices may fall by 50%], the increase in nonperforming loans will still be small. Credit risks in property development or mortgage loans appear controllable to me," he said.
BoCom was among the first Chinese banks to complete fund-raising to shore up its capital base after last year's credit boom in support of the government's economic stimulus program. The bank said in July it had raised 33 billion yuan via a rights issue in Shanghai and Hong Kong.
As of June 30, BoCom's capital adequacy ratio was 12.17%, up from 12.00% at the end of last year and above the 11.5% regulatory minimum for large Chinese banks.
China Merchants Bank raised a total of US$3.18 billion from selling rights shares in Shanghai and Hong Kong in April. As of end-June, its capital adequacy ratio was 11.60%, up from 10.45% at the end of last year.
Rose Yu and Aries Poon