Increased provisioning for bad loans at the urging of the regulator and narrowing interest margins have hurt the profitability of major Chinese banks during the first quarter of this year.

Industrial and Commercial Bank of China (ICBC), the world's largest bank by market value, posted a net profit growth of just 6.16 percent in the first quarter, to 35.2 billion yuan, the bank said in a statement yesterday.

The country's second largest bank, China Construction Bank (CCB), said on Friday its 2009 first quarter profit fell 18.3 percent from the year earlier period, to 26.3 billion yuan.

ICBC yesterday said it set aside 4.2 billion yuan in the first quarter as provisions for bad loans, while CCB kept 6.88 billion yuan aside for the first quarter against possible debt defaults. This was a big jump from the 261 million yuan it set aside a year earlier.

Chinese banks extended a record 4.58 trillion yuan in new loans in the first quarter, more than triple the amount for the same period a year ago. The lending surge has raised concerns among economists and analysts that non-performing loans will be on the rise since China's economy is still recovering from the global downturn.

The China Banking Regulatory Commission earlier asked domestic banks to increase provisioning for bad loans and improve their capital adequacy ratios to protect their asset quality.

Provision coverage ratio at ICBC and CCB rose to 132.02 percent and 141.75 percent, respectively, in the first quarter.

Despite a 0.95 percentage points drop from the end of 2008, ICBC's capital adequacy ratio stood at 12.11 percent, while CCB improved its ratio to 12.37 percent, up 0.21 percentage points from the end of last year. The international minimum is 8 percent.

"Sufficient provisions for bad loans can help secure asset quality at Chinese banks this year. The biggest challenge facing those banks is the impact of a series of interest rate reductions by the central bank," Bohai Securities analyst Zhang Jijun wrote in a report.

China's central bank went in for a series of interest rate cuts since September last year to boost economic growth amid the global financial crisis, prompting a fall in the net interest margins at major domestic banks. It also further dampened profitability at the country's top two banks, ICBC and CCB.

ICBC said its net interest income in the first quarter fell to 57.7 billion yuan, down 12.88 percent from a year earlier, mainly due to narrowing interest spreads.

CCB's net interest margin fell to 2.58 percent in the first quarter, down 68 basis points from the same period last year, causing its net interest income to drop 6.55 percent to 50.87 billion yuan. A basis point is 0.01 percentage point.

China Jianyin Securities analyst Chen Shuixiang said in a report that the net interest margin at Chinese banks has bottomed out in the first quarter.

Guo Min, an analyst at Shanghai Securities, projected that domestic banks would see positive profit growth in the second half of this year.

Shares of ICBC fell 0.75 percent to 3.99 yuan in Shanghai before the results were released yesterday. Shares of CCB held steady at 4.35 yuan.

Meanwhile, the price of ICBC's H shares tumbled 5.85 percent yesterday on market speculation that Allianz SE and American Express would sell their stakes, totaling $4 billion at current market value, in ICBC after the expiration of the lock up period on half of their combined holdings today. The lockup on the other half will expire on Oct 20.

(China Daily April 28, 2009)