China Merchants 2007 net profit estimate augurs well for mainland banks

China Merchants 2007 net profit estimate augurs well for mainland banks

	Published : Tue, 08 Jan 2008 08:57 By : Agencies Print this Story

HONG KONG (Thomson Financial) - The strong 2007 net profit estimate announced by China Merchants Bank (CMB) augurs well for the earnings performance of other top Chinese lenders, which may have come under pressure due to a series of economic tightening measures imposed by the mainland to cool its economy and curb inflation.

The mainland's sixth-biggest bank late Monday said that preliminary figures indicated that its 2007 net profit under Chinese accounting standards grew by 110 percent. It did not specify a net profit figure.

Most analysts were expecting the bank's net figure to grow by about 80 to 100 percent last year. The bank posted a net profit of 7.11 billion yuan in 2006.

Last year's net profit was driven by higher revenue from loans, increased interest margin and income from fee-based operations such as wealth management and credit card sales.

China's central bank, the People's Bank of China, increased the reserve requirement 10 times last year to 14.5 percent. The central bank also raised during the year its benchmark one-year lending rate six times to discourage borrowing.

'That's a good omen for the Chinese banking industry as a whole,' said Paul Lee, analyst at Tai Fook Securities. 'Investors were earlier afraid that the austerity measures imposed by China would affect earnings growth. Obviously, the latest revelation showed otherwise.'

China's gross domestic product expanded more than 11 percent in each of the third and second quarters of 2007, pushing inflation to the highest level in 11 years.

CMB's 2007 net 'confirms our view that the fourth quarter 2007 and estimated 2008 earnings of bigger banks such as ICBC (Industrial and Commercial Bank of China), Bocom (Bank of Communications) and CCB (China Construction Bank) could be strong and visible, if China curbs hyperinflation in the first half of 2008,' Goldman Sachs said in a report Tuesday.

Founded in April 1987, the Shenzhen-based bank is one of the mainland's leading banks that has a strong foothold in the consumer market. It pioneered Internet banking and the issuance of dual currency credit cards in China.

'In a more uncertain environment, CMB offers a solid track record with the lowest non-performing loan (NPL) ratio and is one of the biggest consumer banks in China,' said Dominic Chan, analyst at CLSA.

At end of 2007, the bank's NPL ratio was estimated at 1 to 2 percent of total loans, among the lowest in the industry, Chan said. The average NPL ratio of Chinese banks stood at around 8 percent, he said.

CCB International said it is raising its target price for CMB to 42.30 Hong Kong dollars from 41 after the higher-than-forecast 2007 net profit.

In the first nine months of 2007, the bank's net profit more than doubled to nearly 10 billion yuan from 4.37 billion yuan a year earlier. In 2006, its net rose 88 percent to 7.1 billion yuan.

In November last year, CMB became the first Chinese bank to be allowed to set up a branch in the US since the founding of the People's Republic of China in 1949.

The bank, which has over 400 branches in 30 major cities in China and Hong Kong, plans to support the operations of Chinese companies abroad through its New York branch. The New York branch added to its presence in more than 80 countries overseas.

Profit growth this year may be a different story as the austerity measures will likely take their toll on banks' earnings. China will also impose a cap on lending growth for banks this year.

'Earnings for 2008 will be a lot slower. There is no way that banks profits will grow 100 percent year after year. But even if their profits grow 20 percent or 30 percent this year, there is still a lot of value in Chinese financial institutions,' Tai Fook's Lee said.

China is widely anticipated to further raise its benchmark interest rates and possibly the reserve requirement this year should inflation remain high.

'Given a tougher environment, investors should expect profit growth of around 40 percent for CMB,' CLSA's Chan said. 'The austerity measures adopted by China will have its full impact on banks' earnings this year.'

Shares of CMB last traded up 1.25 Hong Kong dollars or 4.2 percent at 31.35 dollars, after rising by more than 6 percent this morning.

(1 US dollar = 7.80 Hong Kong dollars, 7.30 yuan)

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