Industrial and Commercial Bank of China Ltd (ICBC) and rival Bank of China reported forecast-beating profit gains as the country's big lenders feast on surging demand in a fast-growing economy.
Beijing has tightened liquidity to cool an economy growing by more than 11 percent, but the impact on the biggest banks has been limited because they benefit from rising interbank rates and have relatively low loan-to-deposit ratios. Also on Thursday, the two state-run banks revealed combined exposure of $10.9 billion to US subprime mortgage-backed debt and related holdings.
Shares in China's banks are some of the world's most expensive as investors buy them as a proxy for economic growth. "As long as China's economic growth is stable and fast, these big banks will continue to benefit," said Huang Yan, an asset manager at Guotai Fund Management, which manages 70 billion yuan (US $9.2 billion). ICBC, worth more than US $280 billion, last month overtook Citigroup as the world's biggest bank by market value.
Its Hong Kong shares trade at more than 23 times forecast earnings, and Bank of China trades at 19 times, compared with Citi's 10 times. The Shanghai-listed shares of ICBC and Bank of China trade at far richer premiums.
"I think share prices of big banks like ICBC and BOC are at reasonable levels nowadays as we can see their business performances are very strong," said Guotai's Huang Yan. ICBC posted a 62 percent jump in January-June profit to 41.04 billion yuan (US $5.4 billion), compared with 25.4 billion yuan a year ago - beating the average forecast of five analysts polled by Reuters.
Rival Bank of China, the country's top foreign exchange lender, saw second-quarter profits surge 87 percent to 17.84 billion yuan from 9.52 billion yuan a year earlier, topping a 15.2 billion yuan forecast of six analysts polled by Reuters. Bank of China said it held US $8.965 billion in US subprime mortgage-backed bonds and US $682 million in collateralised debt obligations (CDOs) at the end of June and had set aside provisions of 388 million yuan (US $51 million) and 758 million yuan, respectively, to account for potential losses.
The subprime bonds account for 3.51 percent of its securities portfolio, while the CDOs account for 0.27 percent of the total. ICBC said it held US $1.23 billion in subprime mortgage-backed securities, accounting for 4.32 percent of its foreign exchange investment portfolio. The bank, in which Goldman Sachs, Allianz Group and American Express hold stakes, said it had incurred no loss on the portfolio.
ICBC's first-half net interest income from loans rose by a third to 102.2 billion yuan as Chinese firms borrowed heavily to fund expansion. Rising demand for its wealth management from increasingly prosperous customers drove up six-month net fee and commission income by nearly 90 percent.
Six-month net interest income at Bank of China, in which Royal Bank of Scotland owns nearly 4.5 percent, rose around 30 percent. Bank of China's BOC Hong Kong unit, Hong Kong's second-largest bank, topped forecasts with a 5.3 percent gain in first-half net profit to HK$7.47 billion.