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China Review: Banks Report Strong 1Q Results, Look to Raise Capital to Shore up Balance Sheets

Chinese banks report strong quarterly earnings last week and announced plans aimed at shoring up balance sheets

Dan Su, CFA 04 May, 2010 | 0:00
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Banks Report Strong 1Q Results, Look to Raise Capital to Shore up Balance Sheets

The four largest state-owned banks and seven commercial banks have reported first-quarter results. On average, total assets of these banks grew 6.7% from the year end of 2009, while loans and deposits increased 6.6% and 6.1%, respectively. Profits in the first quarter were boosted by double-digit increases in net interest income as well as commissions and surcharges, and net income increased 31% year over year. Shareholder equity at these banks grew by an average of 6.9%.

Two major state-owned banks, Bank of Communications and Bank of China (BOC), expanded their loan portfolios most aggressively, with 8.7% and 8.3% increases in outstanding loans year over year, but they also saw the sharpest increases in deposits. Among the commercial banks, China Merchants Bank and Hua Xia Bank (which Deutsche Bank owns a 17% stake in as its largest shareholder), extended credits at the fastest pace. Hua Xia Bank and China Citic Bank saw the fastest growth in deposits.

Except the largest three banks, namely Industrial and Commercial Bank of China (ICBC), China Construction Bank, and BOC, all the other banks that we studied have loan/deposit ratios exceeding the upper limit of 75% imposed by the banking regulators. This has spurred the banks to step up their efforts to attract deposits. The capital adequacy ratio (CAR) at most banks declined from the end of 2009 but stayed above 10% except at smaller banks such as Shenzhen Development Bank, Hua Xia Bank, and China Citic Bank.

To help the major banks boost their capital, Central Huijin, the government agency and largest shareholder of the state-owned banks, recently lowered the special cash dividend payout ratio for ICBC, China Construction Bank, and BOC, and publicly voiced its support to the massive capital-raising plans of these three banks.

Market Recap

The stock market continued to decline in the past trading week, as details emerged about the tightening measures in the housing sector and investor confidence remained weak. Although stellar first-quarter bank results lifted the market slightly on Friday, it was too little and too late to reverse the downward trend. The Shanghai Composite Index ended the week down 3.8% to 2,871 points, while the Shenzhen index fell by 4.6% to 11,162 points.

The Shanghai Composite Index has suffered the biggest monthly decline year to date, dropping 7.7 % in April. The fall accelerated in the second half of April, after the government unleashed a series of tough policies to clamp down on speculation in the overheated housing market. The benchmark index fell 12% in the first four months of 2010, making China one of the worst performing markets in the world this year.

Macro and Industry Updates

World Expo 2010 Opens in Shanghai

The World Expo opened in the financial hub of Shanghai on Friday, with a spectacular fireworks show and a grand opening ceremony. The expo will feature pavilions from approximately 250 countries and regions to showcase their vision of sustainable development as well as technologies to achieve the goal. The expo will last until October, and organisers estimate that about 70 million visitors, mostly from China, will attend the expo over the next six months. Airlines, travel agencies, and hotels are expected to benefit from the sharp increase in tourist traffic.

Chinese Steelmakers to Negotiate with Iron Ore Suppliers Individually

China Steel Industry Association, a semi-government organisation that represents steelmakers in iron ore price negotiations, this week gave tacit approval for steelmakers to secure iron ore supply by talking individually with suppliers. This marks the breakdown of annual benchmark contract negotiation this year. According to various media reports, some steelmakers have turned to the spot market, while others plan to use prices set by a quarterly pricing system between suppliers and steelmakers in Japan and South Korea. In the first quarter of 2010, Chinese steelmakers paid an average of $96.3 per ton for iron ore imports, up 21% year over year, and the prices look set to go up further in the coming quarters.

China-based Wuxi PharmaTech (WX) to Be Acquired by Charles River Laboratories for $1.6 billion
Charles River Laboratories (CRL) announced its intent to acquire Shanghai-based WuXi PharmaTech (WX) in a combination cash and stock offer valued at $1.6 billion. WuXi shareholders will receive $11.25 in cash and $10.00 of Charles River common stock in exchange for each of their shares. Charles River will finance the transaction with a portion of its cash balance and new sources of debt financing. WuXi has agreed to this offer, and the firms expect the deal to close in the fourth quarter. As one of the fastest-growing contract research organisations in the Chinese market, WuXi will allow Charles River to gain better access to the region's abundance of relatively inexpensive scientific personnel.


Contributions from Iris Tan, Zhao Hu and Lauren Migliore.

This is an edited version. The article originated from Morningstar.com.au.

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About Author

Dan Su, CFA  Dan Su, CFA, is a senior stock analyst with Morningstar.

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