ICBC More Than Doubles Bad Loan Write-Offs as Profit Rises

Mar 27, 2014 9:36 pm ET

(Updates with shares in fifth paragraph, analyst downgrade in 10th.)

March 28 (Bloomberg) -- Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, set aside lower provisions for bad debt than analysts estimated and more than doubled write-offs, allowing it to boost earnings.

Net income in 2013 rose 10 percent to 262.6 billion yuan ($42.3 billion) from a year earlier, the Beijing-based bank said yesterday in a statement. That compares with the 261.5 billion- yuan average estimate in a Bloomberg analyst survey. ICBC wrote off 16.5 billion yuan of sour debt last year, up from 7.5 billion yuan in 2012.

Write-offs “will mitigate nonperforming loan ratios,” Ismael Pili, a Hong Kong-based analyst at Macquarie Group Ltd., said by phone. “That doesn’t mean asset quality isn’t as bad as we expected. The perennial issues revolving around asset quality, capital and liquidity will continue.”

ICBC’s profit growth last year was less than half its post- financial crisis peak in 2010, as the government reined in a credit boom and opened the banking system to more competition. Standard & Poor’s said last month banks’ loan quality and profitability will further weaken in 2014 because of debt-laden local government financing vehicles and manufacturers with excess production capacity.

ICBC shares in Hong Kong rose 1.1 percent to HK$4.67 at 9:33 a.m. local time, narrowing this year’s decline to 11 percent. The benchmark Hang Seng Index gained 0.7 percent.

Soured Debt

The bank’s bad loans may increase a little this year, President Yi Huiman told reporters in Hong Kong yesterday after a briefing for the earnings.

The lender said it set aside 38.3 billion yuan against soured loans in 2013, 14 percent more than a year earlier and less than the 39.6 billion yuan median forecast in a Bloomberg survey of 15 analysts.

While provisions were lower than estimated, nonperforming loans rose to 93.7 billion yuan as of Dec. 31 from 87.4 billion yuan three months earlier. Sour debt as a percentage of total lending increased to 0.94 percent from 0.91 percent at the end of September, according to the bank’s statement.

“ICBC’s credit quality is clearly deteriorating,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia, wrote in a note today. “There are clear asset quality and margin pressures” that could reduce earnings growth to 7 percent in 2014, he said.

Antos downgraded ICBC to neutral from buy and cut his share-price target to HK$4.90 from HK$5.50.

Economic Slowdown

Lending is slowing as the government discourages credit to overextended industries and local governments, and as China’s economic expansion eases. Growth in local-currency loans dropped last year to 14.1 percent, the least since 2005, People’s Bank of China data show.

ICBC had 9.9 trillion yuan of outstanding lending at the end of last year, a 12.7 percent gain from a year earlier. Growth in 2012 was 13 percent.

China’s gross domestic product increased 7.7 percent in 2013, the same rate as in 2012. The rate is forecast to drop to 7.4 percent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg News survey.

ICBC’s net interest income gained 6 percent to 443 billion yuan in 2013, lower than the average 447.6 billion yuan estimate of 14 analysts surveyed by Bloomberg. Net interest margin, a measure of lending profitability, declined to 2.57 percent from 2.66 percent a year earlier.

“The margin is something I am very bearish on,” Macquarie’s Pili said. “I expect margin pressure to continue, particularly with Internet offerings creating a tight liquidity situation.”

Largest Lenders

Competition is rising as Alibaba Group Holding Ltd. and Tencent Holdings Ltd. lure household deposits from banks with online financial products that offer higher returns. The banking regulator has also approved a trial program allowing the creation of five privately owned banks.

Internet financing will help boost the efficiency of financial services, ICBC’s Yi said yesterday. The company will utilize the new platform and cooperate with Internet firms, he said.

ICBC was the third of China’s four largest banks to report earnings this week. Agricultural Bank of China Ltd. posted a 13 percent increase in fourth-quarter profit on March 25 and Bank of China Ltd. reported a 10 percent gain the following day. China Construction Bank Corp. is due to release its earnings statement on March 30.

Lower Valuations

Bank of China’s profit unexpectedly increased as more overseas loans helped it widen interest margins. While Agricultural Bank also reported improved margins, profit growth slowed for a second quarter amid weaker loan growth.

ICBC’s fourth-quarter profit rose 8 percent to 57.1 billion yuan in the three months ended Dec. 31, according to Bloomberg calculations based on the full-year figures.

Shares of China’s four largest banks sank to the lowest valuations on record in Hong Kong this month amid concern asset quality is deteriorating. Nonperforming loans for Chinese banks increased for nine straight quarters to 592.1 billion yuan at the end of December, the highest since September 2008.

Compounding concerns over banks’ earnings are worries over lending to property developers following Zhejiang Xingrun Real Estate Co.’s collapse this month. That came after Shanghai Chaori Solar Energy Science & Technology Co. became the country’s first company to default on onshore bonds when it failed to make a full coupon payment on March 7.

While ICBC saw potential short-term risks from China’s housing industry, they won’t impact bigger trends in the market, Chief Risk Officer Wei Guoxiong said at yesterday’s briefing. Housing can grow at a healthy rate, he said.

--With assistance from Zijing Wu in Hong Kong.