China's ICBC said Thursday that profit for the first six months of 2010 was 84.6 billion yuan or $12.4-billion (U.S.).DAVID GRAY
Top Chinese lenders ICBC and Bank of China signalled a peaking of earnings growth after strong second-quarter profits, as they slow their lending and focus on asset quality.
Chinese banks have benefited over the past year from a jump in interest income and improving margins after the government backed them in a 2009 lending boom to stimulate the economy.
But many fear they may soon have to pay the piper as China tightens liquidity to cool a racing economy, and as regulators require them to prepare for an increase in bad loans if the real estate market starts to decline.
"Banks' profit growth may have peaked as lending is likely to slow in the second half, while there's little room for interest margins to rise further," said Qiu Peng, analyst at Western Securities.
"There's also lingering concern over banks' asset quality in the even of a drastic slowdown in the economy, but so far, there's no signs of deterioration. But such fears will continue to weigh on banking stocks."
Industrial and Commercial Bank of China (ICBC) and Bank of China, the country's No. 1 and No. 4 lenders, posted second-quarter profit growth of 38 per cent and 15 per cent, respectively, on Thursday on the back of the lending boom.
The results capped a season of strong quarterly earnings by Chinese banks, reflecting an economy that grew by a turbo-charged 10.3 per cent during the second quarter.
But uncertainties - from rising bad loans, to a slowing recovery in interest margins and a tightening regulatory environment - are mounting.
The HSI-Finance Index which tracks major Hong Kong-listed Chinese banks, is down 10.4 per cent this year, nearly double the 5.7 per cent drop in the main Hang Seng Index, as investors worry about the sector's health as well as massive planned capital-raisings to replenish their balance sheets.
Responding to Beijing's shift toward monetary tightening, China's banking regulator conducted stress tests on banks this month, asking them to evaluate the impact on their balance sheets in the event of a 60 per cent slump in home prices.
The regulator is also diagnosing the health of an estimated $1 trillion worth of loans to local government infrastructure, though results of both tests have not been made public.
To ward off risks, regulators have urged banks to strengthen their books weakened by last year's 9.6 trillion yuan lending binge ($1.4-trillion U.S.), triggering a fundraising rush among lenders to raise more than $80-billion dollars in total to buffer potential losses.
ICBC, in which Goldman Sachs, Allianz Group and American Express hold stakes, will sell convertible bonds this month worth 25 billion yuan, and will also raise up to 45 billion yuan through a rights issue in Hong Kong and Shanghai.
Bank of China, which raised about $5.9-billion by selling convertible bonds in June, plans to raise up to 60 billion yuan through a rights issue.
The moves come after Agricultural Bank of China's (AgBank) record $22.1-billion initial public offering in July and China's Everbright Bank's roughly $3-billion IPO this month, and are part of a broader series of fund-raising by major banks.
Three of China's "Big Four" state banks - ICBC, Bank of China and China Construction Bank - have so far reported second-quarter profit growth ranging from 15-38 per cent, while smaller rivals such as China Merchants Bank and Everbright Bank posted even faster growth.
China's total loans outstanding rose 19.2 per cent during the first half to 47.4 trillion yuan, while net interest margin - a key measure of banks' lending profitability, recovered during the period.
Banks also benefited from a rapid increase in non-interest incomes as they collected more fees and commissions from selling insurance and mutual fund products.
Shares of ICBC, which has a market value of more than $210 billion, closed down 0.18 per cent on Thursday in Hong Kong ahead of the results. The shares have fallen 13 per cent so far this year, underperforming the benchmark Hang Seng Index, which has declined 4 per cent.
Bank of China's Hong Kong-listed shares were unchanged on Thursday, having fallen 5.7 per cent so far this year.