ICBC beats earnings estimates thanks to lower provisions in second quarter

Industrial and Commercial Bank of China beat analysts' first-half earnings estimates, mainly on the back of lower provisions for bad debt in the second quarter.

The world's biggest bank by market value said yesterday that its net profit rose 12.5 per cent to 123.24 billion yuan (HK$150.76 billion). The bank was the last of the big mainland lenders to report its earnings.

The pace of earnings growth was only half that of a year ago, as the economy has slowed and recent regulatory changes - such as interest rate liberalisation - have pinched profit.

While the total pool of money set aside for bad debt rose, second-quarter provisions fell 12.2 per cent to 8.9 billion yuan compared with the first quarter.

Analysts said the lower provisions helped improve net profit, but they cautioned that lenders opting for more prudent provisioning faced less profit downside risk as bad loans rose in a weaker economy.

"It cannot be ruled out that provision expenses are used to smooth earnings, especially when revenue growth slows rapidly," Stanley Li, an analyst at Mirae Asset Securities, said.

ICBC said overall risks were under control and its assets were stable. The bank's non-performing loan ratio, or bad loans against total loans, improved 0.05 percentage point to 0.89 per cent compared with the end of last year. Total bad loans rose nearly 3 per cent to 75 billion yuan.

Industry peers such as Bank of China and China Citic Bank also recorded lower loan-loss provisions in the second quarter compared with the previous quarter.

Michael Werner, a senior analyst at Sanford C. Bernstein, said that as long as mainland banks did not shrink their loan-loss reserve ratios and their loan-loss coverage ratios, "provisioning levels would be sustainable for the current period".

Loan-loss reserve ratio measures reserves against total loans. Loan-loss coverage ratio measures reserves against total bad debt.

China Citic Bank was the only lender among all the Hong Kong-listed mainland banks that posted a drop in both ratios in the second quarter compared with the first quarter, raising concerns with some analysts.

Citic Bank's earnings, which also beat analysts' estimates by rising 29 per cent to 19.4 billion yuan in the first half, were mainly boosted by "ultra-low credit costs [loan-loss provisions] despite crumbling credit quality in the second quarter", said James Antos, a senior analyst at Mizuho Securities.

While the bank's overall pool of money set aside for bad loans continued to rise, it reduced provisions by 2 billion yuan in the second quarter against the previous quarter.

Bad loans rose nearly 10 per cent to about 9.4 billion yuan compared with the end of last year. Its non-performing loan ratio edged up 0.01 percentage point to 0.61 per cent over the same period.

China Citic Bank announced on Wednesday night that Chen Xiaoxian, the bank's president, would be replaced by former China Construction Bank vice-president Zhu Xiaohuang.

"Some people worry that the [personnel] changes are a blood change," Cao Tong, the bank's vice-president, said yesterday at a media briefing about the latest results. "We already have a solid business foundation, so our operations won't be affected."