May 9, China’s 16 listed banks have reaped combined net profit of RMB 229.3 billion in the first quarter for 2011, mainly thanks to strong growth in fees and commission income and sound cost control.
The nation’s top five banks – Industrial and Commercial Bank of China Ltd. (1398.HK, 601398.SH), Bank of China Ltd. (BoC, 3988.HK, 601988.SH), China Construction Ban Corp. (0939.HK, 601939.SH), Agricultural Bank of China Ltd. (ABC, 1288.HK, 601288.SH) and Bank of Communications Co. Ltd. (BoCom, 3328.HK, 601328.SH) – have posted RMB 183.4 billion in net profit for the period, around 80% of the total of listed banks.
The strong growth of listed banks’ profit was partly due to a 51% year-on-year increase in fees and commission income. Take Shenzhen Development Bank Co. Ltd. (SDB, 000001.SZ) for sample, the bank recorded RMB 544 million in fees and commission income for the first three months of this year, up 48.23% from a year earlier, according to statistics compiled by the China Business News.
Robust sales in wealth management products has also contributed to the banks’ well-built Q1 performance. In April, banks issued more than 1,500 wealth management products, an increase of 67.3% from a year earlier. The top three listed banks in wealth management business in the first quarter this year were BoCom, BoC and SDB.
However, banks experienced a fall in their capital adequacy ratios (CAR) in the first quarter, mainly due to regulator’s new rules on loan and risk asset reclassification.
Last December, the CBRC released new rules requiring banks to allocate extra capital to prevent lending to local government financing vehicles from causing more credit risks.
The new rules classify loans to local governments into four types based on repayment ability: Full coverage; basic coverage; half coverage; and no coverage, for which banks should provide a minimum provision coverage ratio of 100%, 140%, 250% and 300%, respectively.
The CAR drop was also because banks started calculating unused credit lines of credit cards into their risk assets in response to the banking regulator’s call.
Banks that saw significant decrease in CAR in the first quarter include Bank of Nanjing Co. Ltd. (601009.SH), Bank of Ningbo Co. Ltd. (002142.SZ), Industrial Bank Co. Ltd. (601166.SH), China Merchants Bank Co. Ltd. (CMB, 3968.HK, 600036.SH) and Industrial Commercial Bank of China Ltd. (ICBC, 1398.HK, 601398.SH).
Their CARs fell by 1.37 percentage points (pps), 0.98 pps, 0.58 pps, 0.56 pps and 0.5 pps, respectively, in the first three months to March, according to statistics compiled by the 21st Century Business Herald.
The China Banking Regulatory Commission (CBRC) has asked banks to calculate 50% of stand-by lines of credit on credit cards they have issued into their risk-weighted assets since the third quarter of last year. But banks only started to do so at the beginning of 2011.
Although banks have not disclosed information regarding credit lines provided via credit cards to their clients, CMB said in its 2010 annual report that it had granted a total RMB 121.2 billion in credit card credit lines by the end of last year; it had unused credit lines totalling RMB 66.29 billion, which means the bank would have to add around RMB 33.15 billion as risk assets onto its books.
By the end of 2010, China Construction Bank Corp. (0939.HK, 601939.SH) and ICBC had granted RMB 227.48 billion and RMB 244.03 billion in credit card credit lines, respectively, with unused credit lines accounting for 76% and 62% of those totals, indicating they might need to add around RMB 86 billion and RMB 76.2 billion, respectively, of such credit lines to their risk assets.
A number of banks such as CITIC Bank Corp. Ltd. (0998.HK, 601998.SH) have started calculating market risk capital into risk assets at the request of the CBRC, which also led to a decline in CAR levels.
In addition, the China Banking Regulatory Commission in early this month released new rules setting stricter requirements on banks’ capital adequacy, leverage, provisions, and liquidity conditions in accordance with the Basel III Agreement, the new global banking capital requirement.
The rules require smaller banks to have a minimum capital adequacy ratio (CAR) of 10.5%, up from the current 10%, while the CAR for systemically important banks has been set at 11.5%, unchanged from the current level.
According to banks’ quarter reports, ABC and SDB did not meet the impending requirements – their respective CARs stood at 11.4% and 10.13% at the end of March; China Minsheng Banking Corp. Ltd. (1988.HK, 600016.SH) and Huaxia Bank Co. Ltd. (600015.SH) have not disclosed their CAR levels in their Q1 reports.
Banks will also be pressured to meet a loan-loss provision requirement once it’s implemented. Smaller banks such as China CITIC Bank Corp. Ltd. (0998.HK, 601998.SH), SDB and Industrial Bank had only 1.53%, 1.61% and 1.38% in such figure as of end-March.
Systemically important banks will be required to comply with the new regulations by the end of 2013 and non-systemically important banks by the end of 2016, while selected banks will be given an additional grace period of two years to comply.