Tuesday, August 22, 2006

Bank of Communications Profit Rises 22%

Bloomberg, Luo Jun and Michele Batchelor, 22 August 2006

Bank of Communications Ltd., China's fifth-largest lender, said profit rose 22 percent in the second- quarter as the economy's growth spurred demand for consumer loans and asset management

Net income increased to 3.13 billion yuan ($393 million), or 0.07 yuan per share, in the three months to June 30, from 2.57 billion yuan, or 0.06 yuan per share, a year earlier, the Shanghai-based lender said in a
statement today.

Bank of Communications, 19.9 percent owned by HSBC Holdings Plc, focuses on offering loans, mutual funds and credit cards to the wealthiest Chinese, those with savings of more than $50,000. New yuan lending by China's banks in the first half rose 50 percent from a year earlier, even as the government tried to cool the fastest economic expansion in a decade.

``There's still a lot of room to grow in consumer banking and mortgages,'' said Winson Fong, who manages $2 billion at SG Asset Management in Singapore. ``Loans may slow in the second half of this year because the central bank doesn't want them to grow so much.'' The company owns stock of Bank of Communications, according to data compiled by Bloomberg.

Net interest income in the second quarter was 9.56 billion yuan, up 27 percent from 7.58 billion yuan a year earlier. The bank provided no other quarterly numbers.

Return on equity was 7.2 percent in the first half, from 6.2 percent a year earlier, the lender said. That compares with HSBC's 18.1 percent.

Shares of Bank of Communications, which raised HK$16.84 billion ($2.17 billion) in a Hong Kong initial public offering last year, have doubled since the sale. The stock closed 1.6 percent higher at HK$4.65 a share today.

The government, which has spent an estimated 3.5 trillion yuan to bail out banks since 1998, is pressing Bank of Communications and other lenders to improve risk-management systems and root out fraud after scandals and embezzlement cases threatened to undermine the banking industry.

Officials at Bank of Communications discovered customers had been ``defrauded'' of 200 million yuan in savings at one of its branches, the lender said in a statement on its Web site June 11.

The bank punished one in 20 of its employees in 2004 for corruption and making bad loans.

The China Banking Regulatory Commission said Aug. 2 it uncovered 480 fraud cases in the first six months, 16 percent fewer than a year ago. Banks thwarted 242 fraud attempts in the same period. Since last year, the regulator has ousted 2,328 senior executives accused of fraud and other illegal activities involving 8.2 billion yuan.

The bank's bad-loan ratio fell to 2.11 percent as at June 30, from 2.37 percent at the end of 2005.

Lending growth may slow as the central government in Beijing tries to rein in loans and investments. Premier Wen Jiabao has criticized banks and local authorities for disobeying directives to cool the economy, which grew 11.3 percent in the second quarter from a year earlier, the fastest pace among the world's biggest nations.

A rise in lending rates in April failed to slow the world's fourth-largest economy. Bank of Communications expects loan growth for the full year will be between 15 and 18 percent, said Peng Chun, executive vice president at the lender. Growth was 16.8 percent in the first six months.

The net interest margin may further widen in the second half from 2.57 percentage points in the first half, Peng said.

The People's Bank of China has raised the required reserve ratio for commercial lenders twice in the past two months. The requirement stands at 8.5 percent of deposits. Every 0.5 percentage-point rise in the ratio reduces available loans by 150 billion yuan, according to a government estimate.

On Aug. 19, the central bank raised the one-year lending rate to 6.12 percent from 5.85 percent. The one-year deposit rate was raised to 2.52 percent from 2.25 percent, the first increase in almost two years.

The interest-rate increases will raise the Chinese banks' net interest margin by 2 to 7 basis points and net interest income by 2.1 percent, Tracy Yu, a Hong Kong-based analyst at Citigroup Inc. wrote in a report on Aug. 21. A basis point is 0.01 percentage point.

Bank of Communications Chairman Jiang Chaoliang has won market share in consumer lending and is tapping HSBC's expertise and its own network of 2,600 outlets nationwide to develop fee-based services, such as credit cards and cash management.

HSBC, Europe's biggest bank by market value, paid $2.18 billion before the IPO for its stake in the lender, the maximum percentage allowed for a single overseas investor. That stake was valued at $6 billion at today's closing price.

By the end of June, the partners had issued 1.08 million dual-currency credit cards, denominated in U.S. dollars and yuan. Rival Pudong Development Bank Co. and partner Citigroup Inc. had issued 337,400 such cards as of June 30.

Bank of Communications and HSBC also may expand into brokerage and insurance services. In September 2005, Bank of Communications started a fund management venture with Schroders Plc, making its entry into the country's $50 billion asset management industry.