By Luo Jun, Bloomberg
SHANGHAI: Industrial & Commercial Bank of China Ltd. (ICBC), the world’s second-largest by market value, said profit jumped 31% last year as the fastest economic growth in a decade spurred demand for loans and asset management.
Net income rose to 49.3 billion yuan ($6.4 billion), or 0.18 yuan a share, from 37.6 billion yuan, or 0.15 yuan a share a year earlier, based on international accounting standards, the Beijing-based bank said in a statement.
ICBC shares have soared 80 % in Shanghai since a record $22 billion initial share sale in October, as investors bet a customer base bigger than Russia’s population will enable the bank to benefit more than rivals from China’s growth. ICBC, whose bad loans were more than one-fifth of the overall in 2004, last week surpassed Bank of America Corp. in market value.
“Chinese banks are not a bargain, but it’s likely this year and next year their earnings will surprise” on the upside, said Sebastiaan De Bont, who helps manage the equivalent of $4.2 billion, including stock in ICBC, at Robeco Group in Rotterdam.
ICBC’s earnings missed the average 51.2 billion yuan estimate of 21 analysts surveyed by Bloomberg, hurt by a narrowing interest margin and higher-than-expected provisions to cover future bad debt.
State-controlled ICBC, which lends almost one in every six dollars in China, said loans grew 10 % to 3.53 trillion yuan as of 31 December and the bank expects 5 trillion yuan in three years. Deposits increased 11 % to 6.35 trillion yuan.
Net interest income gained 6.2 % last year to 163.1 billion yuan. Income from fee-based services, such as selling mutual fund products, surged 55 %.
ICBC’s net interest margin narrowed to 2.39 % from 2.61 % a year earlier, dragged down by the bank’s high ratio of assets that earn low fixed yields.
The net interest margin at rivals Bank of China Ltd. and Bank of Communications Ltd. widened as the central bank twice raised lending rates last year to cool the economy, while lifting deposit rates only once.
The bank’s wealth management income grew 70 % in 2006 as growing affluence in the world’s fourth-largest economy led investors to diversify savings into higher-yielding products.
Goldman Sachs Group Inc., Allianz AG and American Express Co. own a combined 7.28 % of ICBC, a stake that has tripled in value to $10 billion since the investment was made in January 2006. China’s Ministry of Commerce and State Council investment arm Central Huijin Investment Co. control 71 %.
ICBC trades at 2.79 times the price-to-book value for this year, according to Bloomberg consensus estimates. That’s higher than the 1.7 times for HSBC Holdings Plc and 1.94 times for Citigroup Inc.
Its profits per employee for 2005 averaged less than one- sixth the $93,000 at Bank of America and were less than one- third the level at HSBC. Its return on assets was 0.71 % in 2006, compared with 1.27 % for Citigroup and 0.94 % for HSBC.
China’s banks don’t look so over-valued considering their potential, said Gabriel Gondard, who manages the equivalent of $3.5 billion at Fortune SGAM Fund Management, a Societe Generale SA venture in Shanghai. They will become more efficient and “significantly improve” returns on assets over the next few years as they push into underdeveloped areas such as investment banking, he said.
Formed in 1984, ICBC serves more than 150 million individual account holders and has 18,000 branches across the country. Over more than a decade, the bank ran up billions of dollars in bad loans to unprofitable state-owned enterprises as a result of government-directed lending and was recapitalized in 1998 and 2005.
Since 2000, ICBC has cut its proportion of sour debt by 30 percentage points. Its bad-loan ratio dropped to 3.79 % at the end of December after setting aside 32 billion yuan in 2006 for bad-loan provisions, more than the 29.6 billion yuan forecast by JPMorgan Chase & Co.
ICBC’s share sale last year boosted capital for growth. The company in January agreed to acquire 90 % of PT Bank Halim Indonesia, marking the first step into the overseas market. It will consider buying more foreign banks as it accelerates expansion abroad, Chairman Jiang Jianqing said today.
Its valuation of $229.2 billion trails only Citigroup Inc. at $250.3 billion. Shares closed at 5.62 yuan in Shanghai, a 29 % premium to shares in Hong Kong.
Chinese individual investors, lacking investment options, don’t look closely at valuation, said Ronald Chan, chief investment officer of Asian equities at Fortis Investment Management in Hong Kong. “You’ve probably got nowhere else to put your money apart from the stock market.”
This year, investors in China’s banks need to watch the level of bad loans and rising competition, said Kent Yau, a Hong Kong-based deputy head of research at Core Pacific-Yamaichi International.
China fully opened its banking market in December under an agreement to enter the World Trade Organization. HSBC and Citigroup yesterday became locally incorporated in China, paving the way for them to offer banking services in yuan.