Bank of Communications, the first leading mainland bank to report last year's earnings, expected a tough time ahead this year amid the global financial crisis as it announced a 40 per cent increase in last year's profit.
'The impact of the financial turmoil on the global economy is expected to worsen in 2009,' chairman Hu Huaibang said at the lender's results briefing in Hong Kong yesterday. 'The domestic banking industry is also expected to face major challenges with the spreading financial turmoil and the macroeconomic slowdown.'
The fifth-largest mainland lender, of which HSBC Holdings owns 19 per cent, reported a net profit of 28.39 billion yuan (HK$32.2 billion) for the year to December, up 40.05 per cent on the previous year and at the high end of analysts' estimates.
Earnings were driven by a 20.29 per cent increase in loans to customers and a 22.1 per cent rise in net interest income. However, those were partly offset by provisions against potential bad loans.
The bank set aside 2.01 billion yuan as special provision for the financial turmoil, lifting such expenses by 3.84 billion yuan from 2007. Loan-by-loan provision expense increased 383 million yuan.
Provision coverage after deducting general reserves and tax rose to 116.83 per cent of impaired loans from 113.84 per cent at the end of September, and up 21.2 percentage points from the beginning of last year.
The coverage, however, was still lower than the minimum 130 per cent level the China Banking Regulatory Commission has asked lenders to meet to better cushion against default risks amid the downturn.
Mr Hu (above) said the lender had adopted a prudent provision and risk management policy in light of the turmoil. He and other senior executives also voluntarily cut their salaries last year by 10 per cent.
Mr Hu said the central government's stimulus measures would help boost the economy.
Beijing has reduced benchmark lending rates by 216 basis points in five cuts since September last year. The central bank also lifted loan quota restrictions to encourage lending late last year.
The bank's shares yesterday closed at HK$5.25, up 1.94 per cent amid a recent rally in mainland banking stocks after the government's stimulus polices.
Net interest income at the bank came to 65.86 billion yuan last year, up 22.1 per cent. Net interest margin was 2.88 per cent, 30 basis points lower than at the end of September last year.
Sherry Lin, an analyst with Credit Suisse, said: 'We remain cautious on medium-sized China banks, due to their higher margin pressure and increased challenges to manage asset quality. The accelerating margin pressure and lower coverage ratio than peers are major risks for the bank.'