Bank of China

Bank of China profits up 11.5 per cent, but analysts concerned about quality

Meanwhile, Bank of China Hong Kong posts highest first half profits since listing in 2002

PUBLISHED : Wednesday, 30 August, 2017, 6:33pm
UPDATED : Wednesday, 30 August, 2017, 10:32pm

Bank of China reported an 11.5 per cent rise in half-year profits on Wednesday, well above forecasts, but analysts said this was thanks to a reduction in provisions it had set aside to cover bad loans.

China’s fourth-largest lender said profit for the six months to June was 103.7 billion yuan (US$15.7 billion), up from the 93 billion yuan for the same period in 2016 and beating the 2.64 per cent average rise estimated by three analysts.

“Bank of China’s result is definitely a beat, but to me it is a low quality beat,” said Marco Yau, senior analyst at China Everbright Bank International.

“The bank’s operating profit increased mainly because it cut impairment losses on assets by 46 per cent [from 50 billion yuan to 27 billion yuan].”

The reason for that decision was the bank’s strong performance in the first half of last year.

“One of Chinese banks’ management KPIs is that their profits should be similar or better than the previous year, and Bank of China had a strong first half of 2016 thanks to the sale of their interest in Nanyang Commercial Bank,” said Chen Shujin, head of financial research at Huatai Securities.

So as to ensure that they beat last year’s first half results, the bank’s management took the decision to cut the provisions set aside for bad loans.

“I expect that provisions will increase in the second half of this year and profit growth will slow,” Chen said.

Thanks to the reduced impairment losses on assets, the bank’s net interest income rose 6.6 per cent in the period to 165 billion yuan, though this was also thanks to the fact that its net interest margin, a key measure of profitability, was six basis points higher in the second quarter than the first.

The increase in margin was down to higher interest rates both in China and internationally, following rate increases by the US Federal Reserve, the bank’s executive vice-president, Zheng Qinsong, told a press conference in Beijing. He said he expected the net interest margin to remain stable for the rest of the year.

Fee income rose 2.8 per cent thanks to the bank’s exposure to trade and to higher bank card fees.

Bank of China’s non-performing loan (NPL ) ratio was 1.38 per cent at the end of June, down seven basis points quarter on quarter, and below the average of 1.74 per cent for China’s commercial banking sector.

The bank saw signs of deterioration in its loan book in some parts of China, but the level should remain stable overall for the rest of the year, its chief risk officer, Pan Yuehan told the press conference.

However, again the good quality headline numbers masked some changes below the surface.

“If we look at the absolute amount of non performing loans, the bank actually added around one billion yuan of bad debt in the first half,” said Yau.

The NPL ratio is calculated by dividing the amount of bad debts the bank has by its total amount of loans.

“The NPL ratio fell as loan growth was faster than the increase in bad debt,” said Yau.

Bank of China Hong Kong, its Hong Kong subsidiary and the second-largest bank in the city, said its profits for the first half of 2017 were HK$14.6 billion, 24.5 per cent higher than the same period last year, and the highest since the bank listed in 2002.

The bank also announced an interim dividend of 64 Hong Kong cents a share, made up of its usual interim dividend of 54.5 Hong Kong cents, and an additional dividend following the disposal of the bank’s stake in Chiyu Bank.

Speaking at a press conference in Hong Kong, Sui Yang, Bank of China Hong Kong’s chief financial officer, rejected suggestions from the media that investors may be disappointed by the size of the dividend.

“We can choose between higher dividends now, or investing in sustainable growth in the future,” she said.

Sui said that some of the bank’s capital was needed to help capitalise on its new operations in South East Asia, following the transfer of Bank of China’s operations in the region to the Hong Kong subsidiary.

Since October last year, Bank of China’s Malaysia and Thailand units and its Phnom Penh and Jakarta branches have been transferred to BOCHK. The transfer of the Manila and Ho Chi Minh branches is in progress.

Yue Yi, chief executive of Bank of China Hong Kong, also rejected the suggestion that the capital from Hong Kong would be used to support riskier activities in Southeast Asia.

“Our subsidiaries in the region will follow Hong Kong rules around anti-money laundering and ‘know your customer’, and will adopt the bank’s Hong Kong arrangements when it comes to assessing risk,” he said.

Both sets of results were announced after the market had closed on Wednesday. Prior to the results, Bank of China’s shares were up 0.72 per cent to HK$4.10 a share. Bank of China Hong Kong was also up, by 1.64 per cent to HK$40.25 a share.