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| After the flood |
| John Foley / Oct 30, 2009, 00:55 IST |
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ICBC/BoC: Remember when banks were there to lend? China’s biggest financials certainly do. Industrial and Commercial Bank of China and fellow state-controlled lender Bank of China have posted third-quarter earnings swollen by bumper lending sprees after the government ordered them to extend credit to a faltering economy. This unusual period must give way to a tricky transition.
ICBC, the world’s biggest bank by market capitalisation, racked up a 20 per cent year-on-year increase in quarterly earnings, with BOC’s growth only a whisper behind. Together, they lent 30 per cent more in the first nine months of this year than in the whole of 2008.
What Beijing gave with one hand, though, it took with the other. Low policy interest rates have reduced the gap between the interest the banks pay on deposits and the interest they get from loans and investments over the last year, by some 0.65 percentage points at BoC. With interest still around two-thirds of total income, that makes a big dent on the profitability of each yuan invested.
Higher interest rates are unlikely while China’s recovery remains fragile. That could keep margins down well into 2010. Yet lending is already slowing. BoC’s loans grew just 2.6 per cent from the second quarter to the third. Banks may now have to chase other sources of income which could pose risks both for the banks and for their customers. It may already be happening. China’s banks are now selling loans – both good and bad – to so-called trust companies that repackage credit assets for wealth management clients, say people familiar with the situation.
In addition, the banks may seek growth through acquisition. ICBC bid for Thai lender ACL in September, in a hint of bigger things to come. Even Standard Chartered, the Asia-focused, UK-listed bank that itself posted a decent trading update on October 29, could be a target.
China’s megabanks have for the last few years straddled two worlds. On the one hand, they have acted as the tools of Beijing’s monetary policy, while on the other, they have delivered profit growth and sizeable returns to equity investors. If they are to please both sides this time next year, something has to give - and caution may be the first thing to go.
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