The Industrial and Commercial Bank of China (ICBC), China's largest commercial bank, Thursday reported a substantial increase in operating profit for 2004.

The State-owned lender said operating profit for 2004 came in at 74.7 billion yuan (US$9 billion), up 20 percent from the previous year.

Subsequently, return on assets grew by 14 percent from 2003 to 1.33 percent.

After setting aside huge bad loan provisions, the bank said its final book profit will be 3.2 billion yuan (US$385 million).

The bank's non-performing loans (NPLs) decreased by 40.5 billion yuan (US$4.8 billion) during the year, bringing its NPL ratio, as measured by the internationally-accepted five-category classification, down by more than 2 percentage points to 19.1 percent.

The bank's robust performance may help soothe some analysts' worries that the State's tightening measures will seriously erode bank profits and increase their bad loans.

The Chinese Government imposed credit curbs and required banks to tighten lending policies last year to contain rapid increases in loans that had been fuelling excessive fixed investment in some overheated sectors.

Many fixed investment projects were cancelled or suspended, which the China Banking Regulatory Commission, the banking watchdog, said would likely lead to the creation of new bad loans.

The ICBC said it granted 288.9 billion yuan (US$34.8 billion) in new loans last year, up 9 percent on a year-on-year basis.

Nearly 80 billion yuan (US$9.6 billion) of the new loans went to home buyers, while another 152.6 billion yuan (US$18.3 billion) were extended through commercial bills. Both areas are believed to be of low risk.

The bank also said it recalled some 100 billion yuan (US$12 billion) of loans from low-quality projects.

Interest income from lending operations accounted for 62.58 percent of the bank's net operating income last year, which stood at 131.6 billion yuan (US$15.8 billion), it said.

An ICBC spokesman attributed the improvement in loan quality to the growing importance the bank attaches to capital restraint in business development.

"The result of emphasizing growth is restricted by capital strength is a substantial strengthening in the bank's risk management capacities," he said.

Like most of its peers, a low level of capital adequacy is hampering the growth of the ICBC, which is planning an initial public offering.

The bank is expected to receive final regulatory approval for its joint-stock reform plan next month, which will possibly include a capital injection by the Government.

Given the size of the bank, analysts have estimated it would need a recapitalization of 300-400 billion yuan (US$36.14-48.19 billion), far bigger than what its two peers had received a year ago.

The bank's total assets stood at 5.27 trillion yuan (US$635 billion) at the end of 2003. Its capital adequacy ratio stood at 5.52 percent, far below the minimum 8 percent requirement.

The Bank of China and China Construction Bank were picked for a trial joint-stock reform by the Government and received a combined US$45 billion in capital at the end of 2003.

(China Daily January 7, 2005)