Shanghai: Agricultural Bank of China, the nation’s third-largest lender by market value, posted a 14 per cent increase in second-quarter profit as it set aside less funds for bad loans, while lending and fee income rose.
Net income rose to 37 billion yuan (Dh21.3 billion) for the three months from 32.6 billion yuan a year earlier, based on first-half figures published by the Beijing-based lender on Wednesday. That compared with the 38.1 billion-yuan average estimate of 15 analysts surveyed by Bloomberg.
Agricultural Bank joins China Construction Bank Corp in reporting a surge in overdue loans as growth in the world’s second-largest economy slowed. The lender bolstered earnings by setting aside fewer provisions for bad debt as the first cut in benchmark interest rates since 2008 eroded profitability of its lending operations.
“The banks are providing for things in a way that is different from the direction of the economy,” said Bill Stacey, a Hong Kong-based analyst at Keefe, Bruyette & Woods Inc. “The economy has already been weaker during this quarter than many had expected, so the trough will be lower and any turn will be later than expected. Clearly they are underprovided if the economy remains where it is.”
Shares of Agricultural Bank fell 1.4 per cent to HK$2.93 as of 9.50am in Hong Kong, extending this year’s drop to 12.3 per cent and making it the worst performer among the five largest Chinese lenders.
Rural cooperatives
Set up by Mao Zedong in 1951 to finance rural cooperatives, Agricultural Bank was the first commercial lender established in China under Communist rule. The bank had 350 million customers and 23,465 domestic outlets at the end of June, more than any competitor. More than half of its locations are in less developed areas, contributing about 39 per cent of first-half operating income.
Agricultural Bank’s profit growth, the strongest among China’s four largest state-controlled lenders for three straight years, has bolstered capital and may ease concern the company will need to raise funds.
The lender will seek shareholder approval to sell up to 50 billion yuan in subordinated bonds to replenish supplementary capital and increase its capital adequacy ratio, according to a statement to the Hong Kong Stock Exchange. Agricultural Bank has no plans to sell shares this year, Caijing magazine reported, citing Zhang Keqiu, the lender’s head of finance and accounting.
Capital adequacy
“Investors are deterred by its low core capital adequacy ratio and some other historical problems such as poor asset quality and weak internal controls,” Tang Hui, a Beijing-based analyst at Founder Securities Co, said before the announcement.
Its core capital adequacy ratio rose to 9.65 per cent as of June 30, exceeding the 9.5 per cent minimum imposed by the China Banking Regulatory Commission for systemically important banks under a rule to be phased in next year.
Smaller rival Bank of Communications Co this week raised $8.9 billion by selling 6.5 billion A shares in Shanghai and 5.8 billion shares in Hong Kong in a private placement. China Merchants Bank Co, the sixth largest, last month extended by another year its plan to raise as much as 35 billion yuan through a rights offer.
Agricultural Bank’s risk management practices and internal controls were highlighted when it said in July Vice President Yang Kun resigned for “a personal situation” amid reports from local newspapers and magazines that he’s under investigation by the Communist Party’s Central Commission for Discipline Inspection.
Bank’s reputation
While the case hurt the bank’s reputation, operations weren’t affected, President Zhang Yun said at a press conference in Hong Kong on Wednesday.
Agricultural Bank’s non-performing loans fell to 84.5 billion yuan from 85 billion yuan in March, representing 1.39 per cent of total advances. The average bad loan ratio of the five biggest banks stood at 1 per cent as of June 30, according to the China Banking Regulatory Commission.
Still, the lender’s total overdue loans, a broader measure, rose 16 per cent to 85 billion yuan during the first six months. Bigger rival Construction Bank this week posted a 34 per cent increase in loans overdue for more than 90 days.
China Citic Bank Corp on Wednesday reported a 27 per cent increase in second-quarter net income to 10.8 billion yuan, exceeding the average estimate of 9.4 billion yuan by 15 analysts in a Bloomberg survey. Its non-performing loans rose 10 per cent from the beginning of the year to 9.4 billion yuan as of June 30. Loans overdue surged 53 per cent.
Loan pressure
Chinese banks face pressure from a bad loan rebound and margin squeeze in the second half as the economy continues to face uncertainty, Zhang said on Wednesday.
“We shouldn’t be blindly optimistic about future economic growth,” he said. “In a declining economic cycle, I think any banks in any country will face rebound pressure in nonperforming loans. One can understand why Chinese banks are facing this problem now.”
China’s gross domestic product may expand 7.9 per cent in the third quarter and 8.3 per cent in the final three months, according to median forecasts in a Bloomberg survey from August 14 to August 21. The world’s second-largest economy decelerated for a sixth quarter to 7.6 per cent in the three months ending June 30, as Europe’s debt crisis hurt exports and a government drive to cool consumer and property prices damped domestic demand.
Outstanding loans
Outstanding loans at Agricultural Bank stood at 6.08 trillion yuan at the end of June, an increase of eight per cent from the beginning of the year. That compared with 8.6 per cent growth during the same period last year.
In the first half, the bank’s net income climbed 20.7 per cent to 80.5 billion yuan, according to yesterday’s statement. Second-quarter profit was derived by subtracting the first-quarter figure from first-half earnings.
Net interest income rose 15.9 per cent to 167.7 billion in the first six months, while fee income from items including credit cards and custodial services rose 4.8 per cent to 38.9 billion yuan. The bank set aside 22.8 billion yuan against potential bad loans in the first half, 18 per cent less than a year earlier.
“Agricultural Bank is among banks that have foreseen a rebound of bad loans this year so they’ve made adequate provisions since late last year,” said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp. “That enabled them to manage the provisions this year to smooth out earnings.”
The net interest margin, a key measure of lending profitability, narrowed to 2.85 per cent from 2.97 per cent in the first quarter as demand for loans waned while competition for deposits intensified.
The central bank this year gave lenders permission to pay as much as 1.1 times the officially established deposit rate and give discounts as deep as 30 per cent on loans.
