China Construction Profit Soars 71% as Lending, Fee Income Rise

By Chia-Peck Wong and Luo Jun
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Aug. 23 (Bloomberg) -- China Construction Bank Corp., the nation's second-biggest, said first-half profit surged 71 percent as it boosted lending revenue and increased fee-based services.

Net income soared to 58.7 billion yuan ($8.59 billion), or 0.25 yuan a share, from 34.2 billion yuan or 0.15 yuan a year earlier, the Beijing-based bank said in a statement to the Hong Kong exchange last night. The median estimate of five analysts surveyed by Bloomberg News was for profit of 59 billion yuan.

CCB, China's largest mortgage provider, increased lending even as the government implemented economic tightening measures to cool credit growth. While Chinese banks are unlikely to repeat the pace of growth for the rest of this year and 2009, they are still attractive investments because asset quality hasn't deteriorated, said an analyst at JPMorgan Chase & Co.

``If the economy goes for a soft landing, profit growth for Chinese banks should be 17 percent to 18 percent next year,'' JPMorgan analyst Samuel Chen said before the results. ``This is slower, but the de-rating of Chinese banks has already happened and so they are reasonably priced'' compared with U.S. rivals.

Construction Bank, established in 1954 to fund roads, bridges, dams and other infrastructure, is China's largest mortgage and real-estate lender. It provides 23.1 percent of the nation's mortgages and about 12 percent of overall loans.

Shares Fall

CCB's shares, traded in Hong Kong, fell 9.7 percent this year, making it the fifth-best performer on the benchmark Hang Seng Index, which has slipped 27 percent. The stock declined 2.3 percent to HK$5.97 on Aug. 21. Hong Kong's bourse was shut yesterday because of a typhoon.

Chinese banks trade at an average 3.2 times book value with a return on equity of 19.2 percent. That compares with a price- to-book ratio of 1.3 and an average return of 8.8 percent for their U.S. counterparts, according to data compiled by Bloomberg.

Net interest income rose 25 percent to 111.1 billion yuan, China Construction said in yesterday's statement. The bank's net interest margin widened to 3.29 percent from 3.11 percent a year earlier.

Chinese banks extended 2.45 trillion yuan of local-currency loans in the first half, taking the total to 28.6 trillion yuan, an increase of 14 percent from a year earlier, even as the economy slowed in the second quarter to 10.1 percent.

Net fees and commissions from services such as credit cards, custodian services and mutual fund sales, surged 59 percent to 20.2 billion yuan, China Construction Bank said.

Industrial & Commercial Bank of China Ltd., the nation's biggest bank, became the world's most profitable bank this week as it announced record first-half earnings of 64.5 billion yuan.

`Overweight' Rating

JPMorgan's Chen has an ``overweight'' rating on China Construction shares and a six-month price target of HK$7.80.

China's government clamped down on loan growth after Premier Wen Jiabao identified overheating and inflation as the two major problems facing the economy. The central bank raised interest rates six times last year and has boosted the proportion of deposits lenders must hold as reserves to a record 17.5 percent.

China's benchmark CSI 300 Index fell 54 percent this year, making it the world's worst-performing primary index.

China Construction's non-performing loan ratio stood at 2.21 percent at the end of June, down from 2.60 percent on Dec. 31.

The bank had $3.25 billion of investments at Fannie Mae and Freddie Mac, the two largest U.S. home loan providers. Yields on bonds guaranteed by Fannie and Freddie this week rose to the highest since 1986 relative to Treasuries.

To contact the reporters on this story: Luo Jun in Shanghai jluo6@bloomberg.netChia-Peck Wong in Hong Kong at cpwong@bloomberg.net