China Merchants Bank said this year's net profit may rise by 35 percent to 5.25 billion yuan (US$656 million) as a result of a widening profit margin between loan and deposit rates as well as the bank's expanding off-balance-sheet business.

 

The Shenzhen-based bank is China's sixth-largest lender and the second-biggest publicly traded bank on the mainland.

 

Its net profit in the first half of this year rose by 31 percent to 2.8 billion yuan (US$350 million) or 0.23 yuan (3 US cents) per share, it said in an exchange filing to the Shanghai Stock Exchange yesterday.

 

The bank's first-half performance has exceeded the expectations of many analysts, but most believe it will reach its annual performance target.

 

"Like most of the other banks, China Merchants Bank benefited from a widening profit margin between the loan and deposit rates," said Wu Yonggang, an analyst with Guotai Jun'an Securities.

 

"In addition, the bank's impressive growth in off-balance-sheet business also contributed significantly to its profit growth," Wu said.

 

China's central bank raised the benchmark one-year lending rate by 27 basis points from 5.58 percent to 5.85 percent in April this year to cool off the fast-growing economy, but left deposit rates unchanged.

 

Widening profit margins, however, have so far outweighed the effect of the lending rate hike in curbing loan demand for commercial lenders, analysts said.

 

In the first half of this year, China Merchants Bank loaned out 59.39 billion yuan (US$7.42 billion), representing a 12.58 percent increase over its total loan assets, the bank said in yesterday's statement.

 

The bank said its non-performing loan ratio continued to drop in the first half to 2.3 percent by the end of June.

 

Revenue generated from off-balance-sheet activities in the first half rose by 80.24 percent to 1.51 billion yuan (US$189 million), accounting for 13.76 percent of the total revenue income for the period, the bank said.

 

Off-balance-sheet activities involve trading financial instruments such as insurance policies and corporate bills and generating income from commission fees, as opposed to commercial banks' traditional operations, which involve booking loans, taking deposits and generating profit from the interest rate difference.

 

Of the bank's off-balance-sheet business, fee income from credit cards, Bank Securities Express (which provides online securities trading services), and bancassurance topped the league.

 

China Merchants Bank is the biggest issuer of credit cards with the total number estimated at around two million.

 

"The bank stands to profit more from its credit cards business as the business broke even by the end of last year," said Wu.

 

But the lender's capital adequacy ratio continued to drop to 8.36 percent at the end of June from 9.1 percent at the end of 2005, which is seen by analysts as the reason for the bank's intended share offering on the Hong Kong market.

 

China Merchants Bank said in April it would sell 2.2 billion shares, or a 15 percent stake, in Hong Kong to raise about US$2 billion for further expansion.

 

The bank's shares edged up 0.27 percent to close at 7.56 yuan (95 US cents) per share yesterday, compared to the benchmark Shanghai composite index, which lost 0.13 percent.

 

(China Daily August 10, 2006)