Annual Profits Soar at Chinese Banks
Market Values Have Dropped as Investors Shun U.S. Subprime-Related Holdings

By Luo Jun and Chia-Peck Wong
Bloomberg News
Wednesday, March 26, 2008

Industrial and Commercial Bank of China, the world's biggest by market value, said second-half profit grew 70 percent, while earnings growth at Bank of China slowed on $1.3 billion of subprime-related write-downs.

ICBC posted profit of $5.7 billion in the six months ended Dec. 31. Bank of China had a 14 percent increase in profit in the same period, to about $3.8 billion. Earnings were derived from full-year results released by the banks in Beijing yesterday.

For 2007, Bank of China said profit rose 31 percent, to $8 billion, while ICBC said its profit rose 65 percent, to $11.6 billion.

Increased lending and mutual-fund sales drove the gains, as China's fastest economic growth in 13 years spurred corporate borrowing and raised incomes. That hasn't prevented ICBC and Bank of China from losing $216 billion of market value since Nov. 1, as an equity bubble deflated and the U.S. mortgage market collapse prompted investors to shun banks with subprime-infected holdings.

"Bank of China has been mostly bogged down by its exposure to subprime investment while ICBC has largely remained intact," said Fan Dizhao, who helps manage about $8.5 billion at Guotai Asset Management in Shanghai, including ICBC shares.

Beijing-based Bank of China, which started investing in securities linked to risky U.S. home loans six years ago, held $4.99 billion of subprime investments at Dec. 31, down from $10.6 billion in 2006. ICBC ended 2007 with $1.23 billion of subprime-linked holdings. Both banks said they have sufficient provisions for subprime losses.

Chinese banks, flush with cash after selling $74 billion of shares since 2005, bolstered lending by 16 percent last year, according to central bank data. Two-thirds of the more than $500 billion of new loans went to long-term projects, including infrastructure, real estate and manufacturing. Lending at ICBC grew 12 percent in 2007, and it grew 17.5 percent at Bank of China.

Both banks forecast a slowdown in lending this year, as the government steps up efforts to rein in credit. Bank of China expects loan growth to ease to 12 percent this year. ICBC anticipates that lending will expand about 10 percent.

Still, ICBC President Yang Kaisheng said at a news conference yesterday that he's "confident" that the bank can maintain profit growth this year, as it benefits from lower taxes and credit costs.

At $259 billion, ICBC's market value is more than double that of Citigroup, which it overtook as the world's largest bank by that measure in July. Bank of China is worth $158 billion, about the same as J.P. Morgan Chase.