Slowdown looms after Chinese banks post record profits

By Samuel Shen and Doug Young

SHANGHAI/HONG KONG (BestGrowthStock) – Chinese banks, flush from record profits in a first quarter boosted by a year-long lending binge, face a business slowdown as Beijing tries to cool their breakneck lending and keep the economy from overheating.

Industrial and Commercial Bank of China (ICBC) (1398.HK: ) and Bank of Communications (BoCom) (3328.HK: ), China’s biggest and No. 5 lenders, respectively, posted their best-ever quarterly profits on Thursday, joining fourth-ranked Bank of China (3988.HK: ) in a bumper quarter for Chinese lenders.

Chinese banks extended a record 9.6 trillion yuan ($1.4 trillion) in new loans in 2009, nearly double the amount from 2008, under Beijing’s 4 trillion yuan economic stimulus package designed to boost consumption during a global financial crisis.

They continued the brisk pace with 2.6 trillion yuan in new loans in the first quarter.

But that pace is slated to slow during the year as Beijing takes cooling measures to prevent economic overheating, leading to a growing belief that the strong profit growth for Chinese banks may be peaking.

“Chinese banks’ profit growth will likely continue into the second quarter when net interest margins hit a peak,” said Jin Lin, an analyst with Orient Securities in Shanghai.

“Chinese lenders will see their profit growth flatten in the second half as loan growth is set to slow while interest margins are seen stabilizing.”


ICBC (601398.SS: ) and rivals like Bank of China (601988.SS: ) and China Construction Bank (0939.HK: )(601939.SS: ) are being urged by regulators to curb lending and replenish capital after a government-directed lending boom last year weakened lenders’ balance sheets and stoked fears of impending bad loans.

BoCom itself acknowledged that the current environment — in which banks must at once behave like commercial lenders but also heed orders from Beijing — has become a complicated one for them to navigate.

“2010 is expected to be a year with the most complex economic environment for China,” BoCom wrote in a note accompanying its results. “The conditions that contributed to both the overheating and downturn of the economy exist simultaneously.”

“Faced with such complexity, the group will continue to focus on search with its own needs for development,” it said.

That kind of direction will probably result in a slowdown in loans for the rest of the year, said Fan Kunxiang, analyst at Haitong Securities.

“The pace of lending will slow in the rest of the year, and banks face increasing risks from a faltering property market and a cooling economy,” said Fan. “Under such macro economic circumstances, I don’t expect banks to maintain momentum of rapid profit growth.”

ICBC, in which U.S. bank Goldman Sachs (GS.N: ) owns a 4 percent stake, earned 41.55 billion yuan ($6.1 billion) during the first three months of 2010, up 18 percent from a year earlier and slightly ahead of analysts’ expectations for a 40.9 billion yuan profit.

BoCom’s profit surged 31 percent to 10.45 billion yuan.

The lending binge behind the profit surge has stretched banks’ balance sheets. ICBC said its capital adequacy ratio stood at 11.98 percent at the end of the first quarter, while BoCom’s stood at 11.73 percent. China requires major banks to maintain ratios of at least 11.5 percent.

To bolster their balance sheets, ICBC, BoCom and most of China’s other major banks have announced plans in recent months to raise billions of dollars in new capital through issue of new shares and bonds.

China’s economy (Read more about the fastest growing economy.) grew 11.9 percent in the first quarter, the fastest pace since 2007, fuelling expectations of further monetary tightening that threatens to slow banks’ growth as the country steps up efforts to limit lending and property speculation.

China aims to reduce new lending nationwide by 22 percent this year to 7.5 trillion yuan, while banking regulators have repeatedly urged banks to be cautious in extending credit.

In its latest effort to avert a property bubble, China’s cabinet raised mortgage rates and down-payment ratios for home buyers, and vowed to rein in prices further.

ICBC’s real estate-related loans account for about one-fifth of total lending, and a 30 percent fall in property prices would push up bad loan ratios by four percentage points, China International Capital Corp estimates.

ICBC shares closed down 1.1 percent before the results announcement in Hong Kong, compared with a 0.8 percent fall for the broader market (.HSI: ). BoCom shares ended 0.6 percent lower.

Stock Market Trading

($1=6.83 Yuan)

(Additional reporting by Michael Wei in BEIJING; Editing by Muralikumar Anantharaman)

Slowdown looms after Chinese banks post record profits