Industrial & Commercial Bank of China Ltd. (stock code: 601398), the world's biggest by market value, said first-half profit jumped 61 percent as it extended more loans to fuel a Chinese economy growing at the fastest pace in 12 years.
Net income rose to 41 billion yuan ($5.4 billion), or 0.12 yuan a share, from 25.4 billion yuan, or 0.10 yuan, a year earlier, the Beijing-based bank said in a statement today. That beat the 38.9 billion yuan average estimate of eight analysts surveyed by Bloomberg News.
ICBC last week overtook Microsoft Corp. as the third-most valuable company, as investors bet China's economic growth will drive profit even as banks globally grapple with fallout from the U.S. subprime crisis. ICBC's Hong Kong stock trades at 22 times estimated earnings, against 12 times for Citigroup Inc.
"Banks are still the best proxy to the economy," said Claude Tiramani, who manages $3 billion, including ICBC stock, for BNP Paribas Asset Management in Paris. "China's economy is doing better than any other emerging market, so we believe their current valuation is justified."
The company released earnings after the Hong Kong and Shanghai markets closed. The stock rose 0.6 percent today in Hong Kong and 0.4 percent in Shanghai, valuing ICBC at $282 billion. Microsoft, the world's largest software company, is worth $265 billion and New York-based Citigroup, until last month the biggest bank by market value, has a value of $241 billion.
Citigroup earned $11.2 billion in the first six months.
Flush With Cash
Chinese banks, flush with cash after selling $61 billion of shares in the past two years, are expanding lending, issuing more credit cards and offering wealth management services in an economy that grew 11.9 percent in the second quarter. Loan growth in China has averaged 14 percent over the past five years.
ICBC has skirted the fallout from mounting defaults on risky U.S. home loans that roiled global rivals including HSBC Holdings Plc. HSBC, founded in Shanghai in 1865, yesterday said it will cut 600 jobs and close an office in the U.S. as it retreats from subprime mortgages.
The Chinese company today said it holds $1.2 billion of securities linked to U.S. subprime mortgages. All securities are backed by loans graded AA or higher and ICBC doesn't expect any "material" impact on earnings, it said.
Lending margins, or the difference between what banks charge for loans and pay depositors, have widened as China's central bank boosted its benchmark lending rate four times this year. ICBC's net interest margin widened to 2.65 percent in the period from 2.37 percent a year earlier. Income from lending rose to 102 billion yuan from 76.6 billion yuan.
Earnings 'Spike'
Expectations that profits from lending will keep rising have made China's banks the world's most expensive. Hong Kong-listed Chinese banks trade at about 27 times estimated full-year profits, a 46 percent premium to peers in other emerging markets, according to UBS AG.
Even so, 14 of 17 analyst recommendations on ICBC's Hong Kong shares tracked by Bloomberg over the past two months have been the equivalent of "buy."
"Next year, analysts will have to cut their earnings estimates because the spike in loan growth and margins isn't sustainable," Dominic Chan, a Hong Kong-based analyst at CLSA Asia-Pacific Markets, who rates ICBC "underperform."
Chinese banks rely on interest margins more than do foreign rivals. Non-interest income, such as fees from underwriting bond sales and distributing mutual funds, accounted for 10 percent of ICBC's revenue last year, and for 18 percent at Bank of China Ltd. At U.S. banks, the ratio was 43 percent in 2005, according to China's banking regulator.
Fee Income
Net fee income almost doubled in the period to 14.9 billion, driven by mutual fund distribution, custodian services and credit cards, today's statement said.
ICBC plans to open 1,000 wealth management centers this year to compete against Citigroup and HSBC for a rising number of wealthy Chinese. The foreign banks are targeting customers with at least 500,000 yuan of net assets, after China allowed them full access to its $2.2 trillion of household savings in December.
The number of "affluent" Chinese households with annual income exceeding $25,000 will triple to 8.5 million in 2015 from 2.9 million in 2005, MasterCard Worldwide estimates.