(Updates with shares in the seventh paragraph.)
Aug. 29 (Bloomberg) -- Agricultural Bank of China Ltd., the nation’s third-largest lender by market value, posted a 22 percent increase in second-quarter profit as it set aside less money for bad loans, while lending and fee income rose.
Net income climbed to 45.3 billion yuan ($7.4 billion) from 37 billion yuan a year earlier, based on first-half figures published by the Beijing-based lender yesterday. That exceeded the 42.6 billion-yuan median estimate of 11 analysts surveyed by Bloomberg News.
The lender’s profit expanded faster than earnings at Bank of Communications Co. and China Construction Bank Corp. after it stepped up debt recovery, improved credit-risk management and wrote off some bad loans. Those measures also helped Agricultural Bank, whose 420 million customers exceed the population of any country except China and India, post a smaller increase in soured loans than competitors.
“Asset quality has been good so far, though our concerns remain unalleviated,” Sophie Jiang, a Hong Kong-based analyst at Religare Capital Markets, wrote in a research report yesterday. “Concerns remain over the outlook, especially that of infrastructure loans.”
China’s policy makers announced a national audit of local governments on July 28 amid concern some may struggle to repay borrowings.
Agricultural Bank boosted loans in rural areas and credit to smaller firms and individuals. Lending to so-called small and micro enterprises grew 5.1 percentage points faster than the total during the first half. Fee income from settlement and clearing, sales of wealth management products and custodian services also jumped.
Shares of Agricultural Bank rose 2.7 percent, the biggest intraday gain in almost two weeks, to HK$3.38 in Hong Kong as of 9:34 a.m. local time, narrowing this year’s drop to 12 percent. The stock is the worst performer among the five largest Chinese lenders.
Second-quarter profit at Bank of Communications, the fifth- largest lender, increased 13 percent, while No. 2 Construction Bank’s earnings climbed 9.7 percent. Industrial & Commercial Bank of China Ltd., the nation’s biggest lender by market value, will report first-half earnings today, along with Bank of China Ltd., the fourth-largest.
China Minsheng Banking Corp., the nation’s first private lender, yesterday reported a 20 percent increase in second- quarter profit, in line with analysts’ estimates. Shares of Minsheng rose 3.2 percent to HK$8.38 in Hong Kong.
Agricultural Bank set aside 10 billion yuan as provisions for soured loans in the second quarter, compared with 12 billion yuan a year earlier, boosting the bad loan coverage ratio to 344.5 percent as of June 30.
The bank’s nonperforming loans rose to 86.7 billion yuan as of the end of June from 85.7 billion yuan in March, representing 1.25 percent of total advances. The average bad-loan ratio of the five biggest banks stood at 0.97 percent as of June 30, according to the China Banking Regulatory Commission.
Agricultural Bank’s overdue loans, a broader measure that shows loans with principal or interest past due by at least one day, rose 7.5 percent to 94.5 billion yuan during the first six months. Construction Bank this week posted a 17 percent rise in loans overdue during the same period.
Outstanding loans at Agricultural Bank stood at 6.9 trillion yuan at the end of June, an increase of 8 percent from the beginning of the year. Residential home loans, which accounted for 62 percent of its retail loan book, increased 13.2 percent in the first half to 1.2 trillion yuan.
“Mortgages remain a key strategic focus for the bank’s loan book expansion,” May Yan, a Hong Kong-based analyst at Barclays Plc, wrote in a note today.
Chinese banks’ asset expansion will slow in the second half as economic growth may weaken further, Agricultural Bank President Zhang Yun said at a press conference in Beijing yesterday. That will lead to slower earnings growth in the rest of the year, he said.
Net interest margin, a measure of lending profitability, narrowed to 2.74 percent for the bank in the first half from 2.85 percent a year earlier as the central bank cut interest rates twice starting in June last year while competition for deposits intensified. The industry’s margins will contract further in the second half as policy makers continue liberalizing rates, Zhang said.
“We do expect the earnings outlook to deteriorate in the second half,” when Chinese banks tend to book more expenses and provisions than earlier in the year, Grace Wu, an analyst at Daiwa Capital Markets Hong Kong Ltd., said yesterday. “If income growth slows going forward, then the ability to control costs will be much more important for ABC. It has less flexibility in that regard.”
In the first half, Agricultural Bank’s net income climbed 15 percent to 92.4 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 7.3 percent to 180 billion yuan in the first six months, while fee income from items including credit cards and custodial services rose 22 percent to 47.6 billion yuan.
Agricultural Bank’s capital-adequacy ratio fell to 11.8 percent as of June 30 under new capital requirements that took effect at the beginning of this year. Its core Tier 1 ratio dropped to 9.11 percent.
Both measurements are higher than China’s minimum regulatory requirement, which calls for systemically important banks to have a minimum core Tier 1 ratio of 6.5 percent and total ratio of 9.5 percent by the end of 2013. The levels required will climb by 0.4 percentage points annually for the following five years.
--Jun Luo and Stephanie Tong, with assistance from Aipeng Soo in Beijing. Editors: Nathaniel Espino, Darren Boey