CCB faces lower profitability; more bad loans

A rising number of bad loans threaten future earnings for China Construction Bank Corporation that saw its first-half net profit rise 15% year-on-year.

CCB, one of China’s Big Four state-owned banks, traced the improvement to higher interest income and commissions. Analysts noted, however, that the bank’s rising number of overdue loans raises questions about its asset quality and future profitability.

The bank's net profit growth was less than half the 31% it reported a year earlier. Loans overdue for over three months rose 34% from 2011 stoking fears about the bank's asset quality. Overdue loans are an indicator for future bad loans.

These results reflect a marked slowdown in the economy, the ongoing Eurozone debt crisis and the sluggish U.S. economy, said analysts.

As affected by macroeconomic changes, the nonperforming loan ratios for manufacturing, wholesale and retail trade industries rose, according to CCB.

On the other hand, CCB said its net profit for the six months ended June 30 was US$16.7 billion, up from US$14.6 billion year-on-year. Net interest income, which accounted for more than 70% of the bank's operating income, rose 16% to US$26.7 billion.

Outstanding loans grew 14.5% in the first half compared with an 8% rise in the same period last year. Net-interest margin, a measure of the profitability of a bank's lending business, remained steady at 2.71% compared with 2.70% at the end of 2011.

CCB said its bad-loan ratio dropped to 1% as of June 30 from 1.09% at the end of last year.

CCB, however, continues to benefit from China’s rigid interest-rate regime in which the government sets a ceiling on the interest paid on deposits and a floor on the rates banks charge for loans. China, however, recently loosened these policies and gave banks more leeway in setting deposit and loan rates to boost competition and resuscitate the economy.

Investors are closely monitoring CCB's exposure to China's property market because they are concerned that Beijing's efforts to moderate the real estate sector and local government infrastructure investments will lead to a sharp increase in the bank’s bad assets.