Hong Kong company reporting season

Bank of China, BoCom see profits rise as shadow banking crackdown drives traditional lenders’ revival

Better loan growth and fewer bad debts help ‘Big Five’ lenders to higher profits

PUBLISHED : Thursday, 29 March, 2018, 5:17pm
UPDATED : Thursday, 29 March, 2018, 11:22pm

Bank of China and Bank of Communications (BoCom) reported a better than expected result on Thursday, bringing the banking results season to an end.

All five of the mainland’s biggest lenders saw improved results this year as a result of better loan growth and fewer bad debts.

Bank of China, the country’s fourth-largest bank by assets, reported a net profit of 172.41 billion yuan (US$27.41 billion) for 2017, up 4.7 per cent from 164.58 billion yuan the previous year. That is better than the consensus estimate among analysts polled by Bloomberg, who predicted that its net profit would rise by 1.7 per cent to 167.348 billion yuan. 

Bank of China (Hong Kong), the lender’s local arm, reported a worse than expected result of HK$28.48 billion (US$3.62 billion) for 2017, up 16 per cent from HK$24.57 billion a year earlier. This is below the estimate of a 27 per cent increase forecast by Bloomberg analysts. 

Bank of Communications, the fifth-biggest mainland bank in terms of assets, reported a profit of 70.22 billion yuan for 2017, an improvement of 4.5 per cent over 67.21 billion yuan in 2016. This is better than the 66.068 billion yuan estimated by analysts in a Bloomberg survey.

The top three among the mainland’s “Big Five” banks – Industrial and Commercial Bank of China, China Construction Bank Corporation and Agricultural Bank of China – had all posted improved earnings for last year earlier in the week.

The better-than-forecast results came after a national regulatory crackdown on shadow banking drove more borrowers back to traditional lenders. 

“The mainland economy improved last year, which has benefited the banking sector. The regulatory crack down on shadow banking and wealth management products also helped the Big Five lenders in China with more business opportunities,” said Joseph Tong Tang, the chairman of Morton Securities.

“This trend is likely to continue in the coming year,” said Tong.

Among the five, the Agricultural Bank of China saw the fastest profit growth rate at 4.9 per cent, followed by Bank of China and China Construction Bank, both at 4.7 per cent.

Chinese banking majors deliver improved 2017 earnings

Except BoCom, all the others reported a widening of their net interest margin, with BOC at 1.84 per cent, Agricultural Bank of China at 2.28 per cent, ICBC at 2.22 per cent and CCB at 2.21 per cent. BoCom’s net interest margin narrowed by 30 basis points to 1.58 per cent.

The net interest margin is a key element of a bank’s profitability, which measures the difference between the interest rate it earns on loans and what it pays out in short-term borrowing costs as a proportion of its assets.

Sui Yang, Bank of China (Hong Kong)’s chief financial officer, said during a media briefing on Thursday that while the Hibor rate had risen following an increase in US interest rates, the bank had limited room to raise lending rates for borrowers with a good credit standing for the rest of 2018.

“What has also remained unchanged is the ample liquidity conditions in the Hong Kong banking sector. This has made it challenging for banks to raise lending rates charged from high-quality customers. Also, we have seen an acceleration of growth in the proportion of time deposit [in our deposit mix]. Hence, in terms of our funding for this type of time deposit we also face more pressure,” said Sui.

ICBC beats 2017 profit expectations

The US Federal Reserve on March 21 raised the short-term interest rate, the federal funds rate, by a quarter of a percentage point to a range of 1.5 per cent to 1.75 per cent. In response, the one-month Hibor rose to 0.81 per cent the next day, and was trending up to 0.99 per cent on Thursday.

Sui said that, however, given the still robust economic conditions of Hong Kong, she was hopeful of seeing high single-digit loan growth this year. Given that these trends combined, the bank’s net interest margin could face some pressure this year.

Bank of China (Hong Kong)’s net interest margin was at 1.44 per cent, an improvement of 5 basis points from a year ago.

The regulatory crack down on shadow banking and wealth management products also helped the Big Five lenders in China with more business opportunities
Joseph Tong Tang, chairman, Morton Securities

The bank’s newly appointed chief executive, Gao Yingxin, said it might continue to acquire businesses from its parent, Bank of China, this year. But he also did not rule out the acquisition of banking businesses from other, unrelated sellers.

As part of Bank of China’s restructuring in the Asean region, Bank of China (Hong Kong) has acquired its parent bank’s businesses in Thailand, Malaysia, Indonesia and Cambodia over the past two years.

In January, it also acquired Bank of China’s Vietnam and Philippines businesses. Gao said that together with its self established branch in Brunei, Bank of China (Hong Kong) currently operates in seven markets in Southeast Asia.

“We are targeting to grow both the lending and deposit businesses of our Southeast Asian business at rates that would be higher than the bank’s overall loan and deposit volume … Southeast Asia remains our focus as we grow into an internationalised regional bank [of the Bank of China group],” said Gao.

Before its result announcement after the market closed on Thursday, Bank of China finished at HK$4.2, unchanged from its previous close; BoCom closed at HK$6.15, up 0.16 per cent; while Bank of China (Hong Kong) finished the day at HK$38.2, down 0.5 per cent.

Additional reporting by Georgina Lee