Chinese banks expected to post strong Q3 as mortgage loans, fees jump
HONG KONG (Thomson Financial) - Chinese banks are expected to report solid earnings when the major players kick off the third-quarter reporting season next week, buoyed by increased fee and commission income and solid mortgage loan growth, analysts said Friday.
""We expect strong results driven by slightly above estimate loan growth, quarter-on-quarter margin improvement, continuing fee growth, favourable trading income and low tax,"" said Bill Stacey, analyst with Credit Suisse.
After posting average earnings growth of 67 percent in the first half on robust fee income growth, the sector is expected to put in another strong showing, supported by the continued rally on the mainland and Hong Kong bourses.
Income from fees swelled 100.9 percent on average in the first half. Banks earn fees on financial products and services such as credit card sales and wealth management.
Mainland banks have shrugged off the five interest rate hikes and eight reserve requirement ratio increases implemented by the Chinese authorities this year.
Yuan-denominated loan growth stood at 17.1 percent at end-September, higher than the regulator's target of 15 percent and above 2005 and 2006 levels.
Retail loans were the main driver of growth with mortgage loans making up 30 percent of total new loans in July and August.
New residential mortgages topped 19.13 billion yuan in the third quarter compared with 12.3 billion in the first half, boosted by the strong property market in the mainland.
""The wealth effect created by investment gains from the bullish A-share stock market has provided the primary support for the rapid growth in mortgage loans,"" said Dorris Chen, analyst with BNP Paribas Equities.
Net interest margins are also expected to improve in the third quarter as bond yield and interbank rates are above the first-half average levels, retail deposits have increased and the quality and mix of loans have been improving, said Morgan Stanley.
Earlier this week, China Merchants Bank, the mainland's sixth-largest bank by assets, said it expects net profit for the first nine months to be more than double the 4.5 billion yuan it made a year ago because of increased fee income.
That would imply a third-quarter net profit of more than 2.82 billion yuan, an increase of 68.7 percent from the third quarter of 2006.
The bank reported a 120 percent increase in first-half earnings at 6.12 billion yuan, driven by fee and loan income, as well as lower taxes.
China Merchants Bank will be the first off the block when it reports earnings on Monday.
Goldman Sachs said it expects net profit for the nine month period to be at least 8.937 billion yuan, or a minimum 70.5 percent of its full-year estimate of 12.7 billion yuan.
China's biggest bank, Industrial and Commercial Bank of China, or ICBC, is expected on Thursday to report 60 percent growth in net profit, as it continues to expand its loan portfolio.
ICBC said net profit increased 61 percent to 41 billion yuan in the year to June on greater loan growth and fee income.
Lehman Brothers said it expects a 90 percent increase in fee income and an 8 basis-point improvement in net interest margin.
""In the third quarter general trends we expect to be carried over from the second quarter include solid loan growth, continued margin expansion, robust fee income led by buoyant capital market derived business,"" said Lehman analyst Lucy Feng.
Bank of China and Bank of Communications are scheduled to unveil earnings on Oct. 30
Bank of Communications, China's fifth largest bank, has already created a stir in the market by revealing a 2007 net profit target of 20 billion yuan, a 63 percent increase from 2006.
The bank posted a 41.8 percent increase in its first-half earnings at 8. 56 billion yuan. Income from fees and commission swelled 139.3 percent to 3.1 percent, buoyed by China's buoyant stock markets.
In 2006, net profit jumped 32.7 percent to 12.26 billion yuan.
BoCom, which is 18.6 percent owned by HSBC, is expected to post a solid performance in the third quarter on rising net interest margins, fee income and benign asset quality, said Nomura International Equity Research.
Analysts expect BoCom to improve its net interest margins in the third and fourth quarter after lagging its peers at 2.73 percent in the first half.
The bank's interest margin were hurt by weak treasury business and an 18 basis-point increase in deposit rates as compared with a flat or decreasing deposit rate at China Construction Bank and ICBC.
Management has been taking steps improve earnings in the third quarter.