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| Experimental lending |
| John Foley / Mar 26, 2010, 00:15 IST |
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ICBC: Industrial and Commercial Bank of China is like a petri dish. Investors can peer inside to see the results of China’s economic experiments. At the moment, the culture looks lively. ICBC’s earnings increased 16 per cent in 2009 as the bank’s outstanding stock of loans increased by 25 per cent. A 25 billion yuan ($3.7 billion) capital raising will give it more room to grow — but that growth may not be so healthy.
China’s biggest lender rattled off new loans like nobody’s business in 2009, but its profit from doing so actually fell. The interest rate spread between what ICBC gets from loans and what it pays on deposits fell by 64 basis points — so even though loans grew, net interest income fell 7 per cent. It more than made up the difference with income from other businesses, such as investment banking and wealth management.
Rising markets created fertile conditions. Returns on financial investments rose to 7 billion yuan ($1.03 billion), from nothing last year. And while the bank took 82 billion yuan of loan impairments, three-quarters was cancelled out by bad loan provisions that turned good again. The bank didn’t explain whether that reflected China's surprisingly fast recovery, or a more optimistic view of borrowers’ health — but both probably played a role.
ICBC's stimulus-fuelled growth may yet stumble. The biggest risk is its reliance on large infrastructure projects. They depend on China's broad economic health — and can take years to show their true colours. Almost a quarter of ICBC’s new lending, for example, went to utilities. If these loans, typically five years or longer, go bad, they tend to do so suddenly, and in bulk. Today’s low bad debt ratio of 1.5 per cent is thus of little use.
That risk may help explain ICBC’s decision to raise more capital. A $3.7-billion convertible bond will top up the broader capital adequacy ratio above the standard 11 per cent. Earnings, which in 2009 were roughly five times what the bank suggested it may raise through its bond, should add more padding. But ICBC may need that and more, if conditions in China’s economic petri dish unexpectedly deteriorate.
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