Shares in China Merchants Bank, the mainland's fifth largest lender, shot up more than 5 percent yesterday after it posted better-than-expected net profit growth of 124 percent for 2007.

China Merchants shares gained HK$1.15 yesterday after it said its net profit more than doubled to over 15 billion yuan last year. Basic earnings per share jumped 96 percent to 1.04 yuan, which translates to a dividend payout of 0.28 yuan apiece.

The bullish stock market was behind the bank's stellar performance. Net fee and commission income catapulted 156 percent to 6.4 billion yuan in 2007. Equities-related agency services alone brought in 774 million yuan - an almost threefold increase over 2006.

Strong demand for credit and bank cards also helped boost China Merchants' profit, bringing in 7.2 billion yuan for the bank.

However, the loans business remains a challenge. China Merchants - which holds no subprime-related investments - had to make a staggering 3 billion yuan in impairment losses, most of which are corporate loan defaults.

Ma Weihua, China Merchants president, said the mainland's tightening policy is making it virtually impossible for some businesses to survive and the bank is seeing more loan defaults.

"Companies that consume a lot of energy, cause pollution and are capital-intensive, are facing a more challenging operating environment," Ma told reporters at the bank's annual results announcement yesterday.

The central government is getting tough on its regulation of the environment and labor as it tries to weed out small, high-polluting and badly managed companies.

But Ma is optimistic that with continued credit risk management improvement, the bank will be able to stave off bad loans. "The percentage of loan defaults actually fell in 2007 over the previous year," Ma said. The bank's non-performing loans ratio dipped 0.58 of a percentage point to 1.54 percent last year.

Repeated interest rate and bank reserve deposit ratio hikes have raised fears mainland bank profits will take a hit.

China Merchants' net interest income climbed 58 percent despite the central bank raising the interest rate six times last year. Most of the gains came from an increase in the volume of interest-earning assets and expansion of interest spreads.

Qin Xiao, chairman of China Merchants, said the mainland banking industry faces more challenges this year. Qin said that with a volatile stock market and more fiscal tightening on the horizon, the bank plans to expand into international markets to ensure profits.

China Merchants' Hong Kong-traded shares closed at HK$22.55 yesterday, gaining 5.37 percent.

(China Daily March 20, 2008)