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Hong Kong company reporting season

China Merchants Bank profits up 11.4pc on higher net interest income, improved asset quality

Improved asset quality and higher net interest income boost confidence

PUBLISHED : Friday, 18 August, 2017, 9:24pm
UPDATED : Friday, 18 August, 2017, 9:24pm

China Merchants Bank, mainland China’s first joint-stock commercial bank, posted profits for the first half of 2017 that were 11.4 per cent higher compared to the same period last year, the bank said in a filing to the Hong Kong stock exchange late on Friday.

The results suggest that mainland China’s other large banks will report solid figures when they publish their interim results later this month.

China Merchants Bank made pre tax profits of 39.26 billion yuan (US$5.9 billion) in the first six months of the year, up from the 35.2 billion yuan in the year-earlier period.

The increase was on the back of higher net interest income and improved asset quality.

The bank saw its net interest income improve in the first half of the year to 70.9 billion yuan, 5.1 per cent higher than the same period last year.

Chinese banks’ interest income dropped significantly in 2016, but this year there has been a divide with those banks with stable funding bases benefitting from tighter liquidity, and the resulting higher rates in the interbank market.

Deposits seen as key factor as Chinese banks’ results diverge

China Merchants Bank’s net interest margin (NIM) was 2.5 per cent, 2 basis points higher than at the end of the first quarter.

“Average loan yield has been increasing due to tight liquidity and bank loan quota, and CMB has been able to maintain relatively stable funding cost thanks to its strong deposits,” said Chen Shujin, chief financial analyst at Huatai Securities, in a note on the bank’s preliminary results released in late July, which were near identical to the official results released Friday.

“Large banks with strong deposits look set to achieve better half-on-half NIM performance as they are less reliant on high-cost interbank liabilities,” she said.

China Merchants Bank’s non performing loan ratio, the much-watched indicator for asset quality, dropped by five basis points in the second quarter to stand at 1.71 per cent.

This was better than the sector average of 1.74 per cent announced earlier in the week, unchanged from the previous quarter. Both figures suggest that mainland banks’ asset quality is under control at present, following high economic growth in the wider economy so far this year.

Chinese banks’ bad loan ratio unchanged at 1.74pc, though risks remain under deleveraging drive

China Merchants Bank reported that asset quality in the mining sector was particularly poor, with an NPL ratio of 14.1 per cent on loans in this industry at the end of June, though it was an improvement on June 2016.

On a regional basis, a higher proportion of loans to western China and north eastern China went bad – NPL ratios of 4.19 per cent and 2.53 per cent respectively at the end of June. In contrast loans in the Pearl River and Yangtze delta regions saw better asset quality, with NPL ratios at the end of June of 1.41 and 1.43 respectively.

“These first indications of the looming results of the Chinese banks should provide further comfort for the sector,” Doug Morton, head of Asia research at Northern Trust Capital Markets, said in a note to clients about the preliminary results.

Before the results were announced China Merchants Bank’s shares in Hong Kong closed on Friday at HK$25.75, down 0.19 per cent on the day, but up 33.4 per cent year to date.

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