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CCB 2006 profit falls

(Bloomberg)
Updated: 2007-04-16 10:20

China Construction BankCorp., the nation's third-largest, said profit fell 1.7 percent in 2006 as provisions rose and the expiration of a tax break outweighed gains on lending in the world's fastest-growing major economy.

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Full-year net income edged down to 46.3 billion yuan ($6 billion), or 0.21 yuan a share, from 47.1 billion yuan, or 0.24 yuan a share a year earlier, theBeijing-based bank said in a statement. Pretax profit, excluding the impact from losing the tax break related to the bank's 2003 bailout and preparation forinitial public offering, rose 19 percent to 65.7 billion yuan.

Growth at Construction Bank, led by Chairman Guo Shuqing, is accelerating as it expanded lending 17 percent last year, the most among China's three biggest publicly traded banks, after the nation's economy grew at the fastest pace in more than a decade. Future growth may be helped by a cushion of capital that was 50 percent higher than the required ratio on June 30.

"Top line is well supported by strong loan growth," said Samuel Chen, aHong Kong-based analyst at JPMorgan Chase & Co. The bank has "strong capital position and the urge" to expand lending more aggressively than competitors. He expects pretax profit to grow an average of 23 percent in 2007 and 2008.

Chinese banks extended 3.18 trillion yuan of new loans last year, exceeding the central bank's target by more than a quarter. Industrial & CommercialBank of ChinaLtd., the nation's largest, had a 31 percent gain in profit as total loans grew 10 percent.

Construction Bank's net income was in line with an average 46.4 billion yuan estimate by 31 analysts in a Bloomberg survey.

Tax Break

The lender declared a sixfold increase in dividends to 0.092 yuan a share, from 0.015 yuan a year earlier.

Construction Bank's earnings were hurt by the phasing out of a government tax rebate in the second half after its October 2005 IPO. The bank paid 19.4 billion yuan in taxes last year, compared with 8.3 billion yuan a year earlier.

Provision charges against loans turning sour rose by 39 percent to 19 billion yuan, while a foreign exchange loss amounted to 6.1 billion yuan.

Net interest income rose 20.4 percent last year to 140.4 billion yuan. Income from fee-based services, including distribution of mutual funds and insurance policies, surged 60.5 percent to 13.6 billion on stepped-up efforts to diversify revenue sources.

The net interest margin at Construction Bank widened to 2.79 percent from 2.78 percent a year earlier as the central bank twice raised lending rates last year to cool the economy, while lifting deposit rates only once.

Rates Beneficiary

The bank will benefit more than rivals from interest rate increases this year, said Holly Tao, a Shenzhen-based analyst at Guotai Junan Securities Co. It has a higher proportion of long- term, high-yield infrastructure and mortgage loans and more short-term deposits that helped keep its funding costs low.

Construction Bank, established in 1954 to fund the building of roads, bridges, dams and other infrastructure, is now the country's largest mortgage and real estate lender. It provides 23.1 percent of the nation's mortgages.

"CCB, in contrast to other big banks, has a pro-growth strategy," Sherry Lin, a Hong Kong-based analyst at Credit Suisse Group, wrote in a April 12 report, citing its gains in lending. She rates the stock "outperform" with a 12-month target price of HK$5.28. "CCB remains one of the better values among Chinese banks."

Global Scale

Construction Bank shares have gained 87 percent since the IPO to HK$4.64, giving the firm a market capitalization of $133 billion, exceeding UBS AG's. The value of Bank of America Corp.'s 8.5 percent stake, for which it paid $2.5 billion before the share sale, has grown more than fourfold.

China has the most expensive bank stocks in Asia's emerging markets, trading at about 2.7 times estimated book value in 2007, compared with 2.3 times for peers in India and 1.6 times for Korea, according to a Macquarie Research report April 12.

Construction Bank is the preferred Chinese bank to buy because it has higher profitability and an attractive valuation and will be less affected by government measures to curb lending, Macquarie analysts Christina Fok and Nick Lord wrote. They forecast an 18 percent return on equity for Construction Bank in 2007, among the highest in the sector.

Construction Bank seeks overseasacquisitions as it prepares to compete with global banks. Construction Bank paid HK$9.7 billion ($1.24 billion) for Bank of America's Hong Kong and Macau unit, the largest purchase by a Chinese lender outside the mainland. The acquisition was completed on Dec. 29.

The bank has no immediate plans to sell shares on the mainland, Guo said last month. Construction Bank controlled about 12 percent the market's loans and 13.2 percent of the deposits in China at the end of June.