China banks’ combined profits amount to an amazing $57b in 1H2011

The top 5 Chinese banks knocked out their 14 largest US and European rivals.

According to a Bloomberg report, itseconomy sustained growth of more than 9%, helped by a record credit boom that powered its rebound from the global recession.

China’s five biggest banks posted first-half profits that surpassed the total of their 14 largest U.S. and European rivals, highlighting the Asian nation’s financial power as other economies falter.

Industrial & Commercial Bank of China Ltd. said yesterday net income rose 29 percent to a record $17 billion, pushing combined profits of the nation’s biggest banks to $57 billion and spurring its shares higher today. Bank of America Corp. and Royal Bank of Scotland Group Plc posted losses as the U.S. economic recovery weakened and Europe’s debt crisis deepened.

China’s banks have increased profits as the world’s second- largest economy sustained growth of more than 9 percent, helped by a record credit boom that powered its rebound from the global recession. The earnings reports and a drop in bad debts may boost investor confidence after bank shares fell this year on concern that $1.7 trillion of local government liabilities may lead to a wave of defaults.

“Shares of Chinese lenders are in a better position to rebound than U.S. banks,” Ronald Wan, a Hong Kong-based managing director at China Merchants Securities (Hong Kong) Co., said by phone. “In the second half, the market will still be concerned about asset quality and fund-raising issues” for banks globally.

‘Capital Discipline’
ICBC and its smaller rivals -- China Construction Bank Corp., Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. -- have fallen an average 18 percent this year as policy makers tighten lending requirements, introduce property curbs and raise interest rates to tame inflation and address concerns that defaults may climb.

That’s still less than the 28 percent drop in the five biggest U.S. lenders, led by Bank of America’s 43 percent plunge, or the 36 percent plummet in Europe’s largest.

ICBC “has shown very strong capital discipline in recent years relative to its peers,” Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, who rates the stock as “outperform,” said in a note today. “Barring a sharp decline in China’s economy, we expect ICBC will be able to grow its capital ratios organically in the coming years in order to meet tougher capital requirements under the Basel III regime.”

Shares of Beijing-based ICBC climbed 2.7 percent to HK$4.98 percent as of 9:50 a.m. local time, making it the best performer on the Hang Seng Index today. Agricultural Bank, which yesterday said profit climbed 45 percent, fell 0.5 percent to HK$3.81.

Weak Profit Outlook
Combined first-half earnings at the 15 largest U.S. banks by assets dropped 17 percent from a year earlier, led by a decline at four of the six biggest. Unemployment in the world’s biggest economy has remained above 9 percent and gross domestic product showed a weaker-than-expected first-half expansion, threatening to further sap bank earnings.

In Europe, lenders led by London-based HSBC Holdings Plc have announced plans in the past month to cut more than 40,000 jobs as the region’s worsening sovereign debt crisis crimps trading revenue. The financial firms are also trimming expenses as regulators force banks to hold more and better quality capital to withstand future shocks.

‘Worst Off’
“European banks are surely the worst off,” China Merchants’ Wan said. “There are questions about their credit quality and their fund raising ability.”

China’s banking regulator has also asked lenders to increase capital buffers and accelerate loan collection schedules for local government debt as it seeks to avert a banking crisis following the record $2.7 trillion credit boom that began in 2009.

As much as 30 percent of the outstanding credit to local governments may sour and become the biggest source of bad debts for banks, Standard & Poor’s has estimated.

The banking regulator told lenders they haven’t set aside sufficient funds to cover losses on local government loans or done enough to revise loan agreements and speed up repayments, a person with knowledge of the matter said in July.

ICBC, which has the most local government loans among China’s top five lenders, said bad debt accounted for 0.25 percent of its 931 billion yuan in such credit as of June 30. Construction Bank said Aug. 22 that the non-performing loan ratio for its 580 billion yuan in local government debt was 1.11 percent, the highest among the five.

Globally, banking stocks have fallen too much, Wan said. Chinese banks may begin to recover once policy makers contain inflation and relax lending constraints, he said.

“Their drop is likely to ease in the second half if nothing major happens,” he said. “But the problems banks are facing now will still be around.”

Photo from Kernbeisser