Construction Bank Profit Rises as Net Interest Margin Gains

(Bloomberg) -- China Construction Bank Corp., the nation’s second-largest lender by assets, posted a 3 percent increase in first-quarter profit as its net interest margin expanded.

Net income rose to 70 billion yuan ($10.2 billion) in the three months ended March 31 from 68 billion yuan a year earlier, the Beijing-based lender said in a filing to the Hong Kong stock exchange Thursday.

The bank’s net interest margin increased to 2.13 percent from 2.04 percent in the fourth quarter, according to calculations by Huatai Financial Holdings (Hong Kong) Ltd. analyst Chen Shujin, who described the rise “significant.”

“Construction Bank’s results show Chinese banks, especially the biggest ones, may see some significant improvement in profit this year,” Chen said. “Their earnings quality is improving because of a better net interest margin and limited new bad-loan formation.”

China’s biggest banks are reporting earnings this week. The profit outlook for the lenders, which have been previously struggling with rising defaults and narrower margins, has improved after economic growth accelerated for two straight quarters. Challenges remain as the government tightens regulations on mortgage lending, off-balance sheet wealth-management products and some cross-border financial services.

Lower Provisions

The Chinese banks are expected to report better net interest margins and lower provisions for the first quarter, said Francis Chan, a Bloomberg Intelligence analyst. Rising interbank rates and bond yields should lift asset yields despite expectations of a continued margin squeeze, he said. Full-year earnings reports from some of the country’s major banks showed that their provisions for losses on soured credit stabilized last year.

Construction Bank’s nonperforming-loan ratio was 1.52 percent in March unchanged from December, the earnings filing showed. It posted a bad-loan coverage ratio of about 160 percent, compared with a regulatory minimum of 150 percent. Net nonperforming-loan formation decreased 30 basis points from the previous quarter to 0.56 percent, according to Chen of Huatai.

One possible hurdle for the bank’s profit growth this year is an escalation in government curbs on property sales as China seeks to prevent a housing bubble. One of the nation’s largest mortgage lenders, Construction Bank’s outstanding home loans accounted for about 30 percent of its total advances as of December, according to its 2016 annual report.

Construction Bank was the first of the nation’s four biggest lenders to report earnings. Industrial & Commercial Bank of China Ltd., the nation’s largest, Agricultural Bank of China Ltd., and Bank of China Ltd. are scheduled to report on Friday.