Merchants Bank says profit will jump 50pc

Lender's shares surge in Shanghai and Hong Kong on the news, which indicates earnings for 2006 of at least 5.9 billion yuan

Shares in China Merchants Bank rose by 4.5 per cent in Hong Kong and 5 per cent in Shanghai after it said profit rose by at least 50 per cent in 2006.

The lender's H shares closed at HK$17.34 yesterday, doubling from its initial public offering price in September last year while its A shares closed at 16.48 yuan.

The surge came after Merchants Bank, the country's sixth-largest lender, on Thursday night said that net profit was expected to increase by more than 50 per cent.

That would mean the lender's 2006 net profit exceeded 5.9 billion yuan, based on its 2005 profit of 3.93 billion yuan.

Merchants had forecast a 2006 net profit of at least 5.5 billion yuan in its Hong Kong listing prospectus.

'The net profit growth is more than our expectation of 40 per cent,' said Yang Qingli, an analyst with Citic Securities in Beijing.

Merchants Bank said its profit estimate was based on mainland accounting standards.

All firms listed on the A-share market are required to issue a notice before the earnings report if they expect profit will rise by more than 50 per cent. Merchants Bank's full-year earnings are scheduled for release on April 13.

'The development of various businesses of the company managed to keep the momentum in 2006,' Merchants Bank said in an announcement.

Shenzhen-based Merchants Bank, regarded as China's most profitable lender, has been strong in its retail business such as the branded card service.

Its earning reports for the first nine months show the lender benefited from the growth in interest income, accounting for more than 80 per cent of its revenue, as well as more fee income and agency fees.

Merchants Bank is diversifying its loan portfolio by providing more convenient services for borrowers.

The bank launched a new loan service last year allowing mortgage borrowers to draw and repay the loans any time. It also allows borrowers at other banks to transfer their home loans to enjoy such service.

Merchants Bank is likely to benefit from the strong growth in fee incomes from services including bank cards, settlement and agency services, according to a China International Capital Corp report. However, its loan yield may suffer because of intensifying competition.

China Merchants is also hoping to increase the liquidity of its assets by loan securitisation. Its board approved a proposal in December to allow it to securitise 3.5 per cent of its total outstanding loans.

Merchant Bank plans to add 1,450 staff this year or 7 per cent of its headcount to compete with foreign lenders, Reuters reported last month.

China allowed foreign banks to set up branches to offer full yuan-denominated services last month as part of its WTO commitments.