China banks to face harder times after bumper 2007

China's huge banks are poised to report strong profit growth for 2007, thanks to a surging economy and stock market bull run, but 2008 is set to be a tougher year for the top three Chinese lenders.

Beijing's clampdown on loan growth to cool its economy, global economic headwinds, fierce competition and a stock market downturn will create challenges for a sector that was also hit last year by direct exposure to the U.S. subprime mortgage debacle.

"In terms of profit growth, Hong Kong-listed Chinese banks reached a peak in 2007. It will be difficult for that to happen in 2008," said Samuel Chen, analyst at JP Morgan.

Bank of China's profit growth is expected to be the weakest among the three state-run giants because of its exposure to subprime holdings, slower fee income growth and higher loan impairment losses.

China's top foreign exchange lender is expected to post a 25 percent increase in 2007 net profit to 53.5 billion yuan ($7.6 billion), according to 26 analysts polled by Reuters Estimates.

Industrial & Commercial Bank of China, the world's biggest bank by market value, is forecast to see a 63 percent rise in its 2007 net profit to 80.5 billion yuan. No. 2 lender China Construction Bank is expected to report its 2007 profit grew 49.6 percent to 69.3 billion yuan.

Bank of China has said it had disposed of all its subprime related collateralised debt obligations (CDOs) in the fourth quarter, which had totalled $682 million at the end of June.

Bear Stearns expected Bank of China to book a substantial impairment loss of 21.5 billion yuan in 2007 and 2008 for its $9.4 billion exposure to subprime securities, while JP Morgan predicts a $1 billion provision for 2007 and a further $1.5 billion in 2008.

At the end of June, ICBC held U.S subprime mortgage-backed securities (MBS) with face value of $1.23 billion, while Construction Bank had $1.062 billion worth of U.S. subprime mortgage loan-backed securities.

LOAN GROWTH, ACQUISITIONS

Chinese banks continued to enjoy net interest margin improvement in 2007, as a booming capital market helped lower funding costs through deposit migration from time deposits to more lucrative demand deposits.

An economy growing in excess of 11 percent drove surging demand for loans, while credit card usage expanded and the booming local capital markets also drove non-interest income.

However, Beijing's efforts to slow loan growth means borrowers in key sectors risk defaulting as the weakening global economy take its toll, which could increase non-performing loans in 2008, analysts have said.

ICBC's loan policies make it less vulnerable than others to tightening measures, analysts said, while Construction Bank has more potentially risky residential mortgages than its peers.

Bank of Communications and China Merchants Bank, the country's fifth- and sixth- ranked lenders, both cut their loan growth forecasts this week for 2008 to comply with Beijing's wishes.

CLSA forecast ICBC and CCB would make 12.5 billion yuan and 9.6 billion yuan one-off provisions for staff retirements, representing 15 to 20 percent of total operating expenses.

Analysts are also focusing on ICBC's acquisition plans after it bought Bank Halim in Indonesia, Seng Heng Bank in Macau and took a 20 percent stake in South Africa's Standard Bank

Bear Stearns said ICBC intends to increase its overseas profit contribution to 10 percent of its total by 2009, from 3 percent in the first nine months of 2007.

Shares in Construction Bank, the worst performer among the three, have declined 22.5 percent in Hong Kong so far this year. Bank of China is down 20 percent, trading below its IPO price of HK$3.07, while ICBC shares are down 14.5 percent.

(US$1=HK$7.8)