Despite the tougher macroeconomic environment, Industrial and Commercial Bank of China (1398), the world's largest lender by market value, says it will weather the storm to grow strongly in 2008 with better risk management and lower credit costs."The key challenges for China banks in 2008 are inflation and asset quality. We think ICBC's defensive balance sheet and fee income franchise should weather these risks relatively well," said UBS banking analyst Sally Ng.
Like other mainland banks, ICBC estimates 40 percent of its fee income to be stock market driven. But fees in other areas were up 35 percent, showing growth last year that can continue, said Ng.
The Beijing lender recorded a better than expected net profit growth of 64.9 percent to 82.3 billion yuan (HK$90.53 billion) in 2007, despite making provisions of US$400 million (HK$3.12 billion) to cover subprime losses.
Taming inflation remains the top priority in the mainland and as the central government has imposed tighter monetary measures to curb loan growth and liquidity from last year, banks have suffered.But ICBC had total loan growth of 12.2 percent in 2007, with local yuan loans up at a steady 10.3 percent and foreign exchange loans up 37.5 percent. Its net interest income rose by 37.3 percent, and net fee income surged 110.4 percent to 34.3 billion yuan.
"There were positive surprises, for its net interest margin expanded 41 basis points to 2.8 percent, and non- performing loans declined by 105 basi
s points," said HSBC analyst Todd Dunivant.Despite continued tighter credit growth controls this year, ICBC has capped its yuan loan growth at 365 billion yuan, the same as last year. "We are confident in maintaining strong growth," said ICBC chairman Jiang Jianqing.
The bank will improve its interest income by lowering credit costs, unification of income tax to 25 percent from 33 percent, more integrated business and further diversification to yuan bond investment, said vice chairman and president Yang Kiasheng.
"We expect credit costs in 2008 to be pushed further down to 0.50-0.60 percent from last year's 0.81 percent," Yang said. Meeting the target would boost net profit by 10 billion yuan, he added.
ICBC said its leading yields rose rapidly in the first two months of 2008 due to repricing of mortgages and increasing loan pricing power amid credit controls.
"We expect the pricing power might offset any interest rate hike this year of up to 54 basis points," wrote Julia Fan Yanjin at China International Capital Corporation in a recent note.
Ng at UBS agreed, expecting the bank's net interest margin to widen to 2.89 percent given a better deposit mix and loan pricing power. ICBC was among mainland banks rumored to be bidding for Hong Kong's Wing Lung Bank. It has declined to comment.
However, chairman Jiang confirmed the bank will purchase overseas assets if they are cheap and have growth potential and synergy with ICBC.
"Investment banking, asset management, insurance and finance leasing all are our focuses," he said.
ICBC was the first mainland bank to make an overseas acquisition when it bought a 90 percent stake in Bank Halim of Indonesia for an undisclosed amount, early last year. It then purchased a 20 percent stake in South Africa-based Standard Bank Group for US$5.5 billion and took a 79.93 percent stake in Macau's Seng Heng Bank for US$580 million.
It opened its Moscow office last year and will open more offices in Doha, Dubai, New York and Sydney this year.
Meanwhile, the bank is also putting increased emphasis on the wealth management business, where profit jumped 381 percent last year. "During the first quarter, we launched 39 new funds and products," said Yang.
According to analysts, the only risk ICBC faces may lie in its US dollar bond portfolio, though its total size was small when compared to those of its peer Bank of China (3988).
"We are comfortable with its exposure but we are concerned that there might be latent risks in its massive US dollar bond portfolio of 193.6 billion yuan, equivalent to 2.2 percent of total assets and 35.6 percent of shareholders' equity. If there is a 5 percent mark-to- market loss, it will lead to a trading loss of 9.2 billion yuan," said Fan at CICC.
By end of 2007, ICBC held subprime related investment of US$1.226 billion, representing 0.1 percent of its total assets. Other related mortgage investments amounted to about US$505 million, or 0.04 percent of total assets, the chairman said.
