Shanghai: Industrial and Commercial Bank of China Ltd overtook Bank of America Corp as the world’s second-most valuable financial firm, even though the Beijing-based company earns about one-third the profit
The bank achieved this milestone at 11.30am in Shanghai, when shares of the bank, known as ICBC, surged 7.7% to 5.71 yuan (around Rs32). That valued the company at $232 billion (Rs10,20,800 crore), surpassing Bank of America’s $227 billion. The bank’s market value now trails only Citigroup Inc.’s $250 billion.
China’s growth and its $2 trillion of household savings are attracting foreign banks such as Citigroup, whose chief executive officer, Charles Prince, on Thursday announced plans to double his network in the country. ICBC trades at earnings multiples that are almost triple those of Citigroup and Bank of America, even as its return on assets trails by more than half.
“ICBC, along with other big Chinese banks, are riding the tide of economic growth and playing catch-up with global banks in size and scale,” said Wu Xuan, a Shenzhen-based analyst at Penghua Fund Management Co. “But the biggest gap lies in operations, management, and risk control.”
Prince, vying with ICBC and Bank of China Ltd for business from consumers and companies, said Citigroup will open 14 branches in China this year, a total of 30. He also said he wants to develop a securities business in a market where trading in stocks more than tripled last year.
“China stands out as a country of unparalleled promise,” Prince said at a press briefing in Beijing on Thursday. A four-year investment boom has powered annual economic expansion of 10%, double the global average, pushing China past the UK as the world’s fourth-largest economy. ICBC, Bank of China, China Construction Bank Corp., Bank of Communications Ltd and China Merchants Bank Co. have raised more than $47 billion from share sales since June 2005.
HSBC Holdings Plc. economist Qu Hongbin this week said China’s gross domestic product may swell more than 11.5 % from a year earlier in the first quarter. That would be the fastest growth since 1994. Hong Kong-traded shares of state-controlled ICBC have soared 43% while domestic shares surged 83% since their October debut, as China’s economy defied slowdown predictions. ICBC has 18,000 branches nationwide and more customers—153 million — than Russia has people.
To defend their valuations, Chinese banks must move away from their business model of taking household deposits and lending to state-run enterprises, said fund manager Lei Wang. That practice led to billions of dollars of bad loans and a government bailout that took years to complete.
“Long term, ICBC should be fine given its strong network which gives it competitive advantage,” said Wang, who helps manage $12 billion at Thornburg International Value Fund in Santa Fe, New Mexico.
ICBC posted 22% profit growth in 2005 and the bank has forecast 2006 net income would rise 26% to 47.2 billion yuan ($6.1 billion). It had a return of 0.65% on its 6.45 trillion yuan of assets in 2005, compared with 1.65% for Citigroup and 1.37% for Bank of America.