Net income rose 8 percent to 64.9 billion yuan ($10.6 billion) for the three months through June from a year earlier, according to an exchange filing by the Beijing-based lender today. That compared with the 64.8 billion-yuan average of 11 estimates compiled by Bloomberg.
A property slump and a slowdown in the world’s second- biggest economy are putting pressure on Chinese lenders just as financial deregulation triggers increased competition for deposits. Overcapacity in industries from steel to shipping underscores the risk of more increases in bad loans, which are already at a five-year high.
“Chinese banks’ profit growth will continue to decelerate,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research, said before the announcement. “We will watch closely developments in industries with overcapacity such as steel trading and real estate.”
Shares of Construction Bank fell 1.5 percent this year in Hong Kong, compared with a 6.2 percent gain in the benchmark Hang Seng Index.
China’s economic growth engines such as real estate and external demand are weakening while replacements are still being formed, the company said in its earnings statement. At the same time, the nation can maintain a “steady” expansion, it said.
Construction Bank’s bad loans increased 12 percent to 95.7 billion yuan as of June 30 from the end of last year, the lender said. In comparison, nonperforming loans at Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. increased by between 11 to 17 percent.
Construction Bank boosted provisions for bad loans by 54 percent to 11.6 billion yuan in the second quarter from a year earlier. Nonperforming loans amounted to 1.04 percent of total advances, up from 1.02 percent in the previous quarter.
The banking regulator is allowing local governments in Shanghai, Guangdong, Zhejiang, Jiangsu and Anhui to set up asset-management companies to buy bad loans from financial institutions, people familiar with the matter said last month. China already has four national bad-loan managers, including China Cinda Asset Management Co., set up in the late 1990s.
China’s housing glut has the potential to weigh on Construction Bank’s earnings. The bank’s outstanding mortgage loans were the highest of any Chinese lender at the end of 2013. Lenders are also facing growing competition for households’ savings from Internet funds, trusts and brokerages.
Construction Bank was the last of China’s five biggest lenders to report for the quarter. ICBC, the nation’s largest bank by assets, posted a faster profit expansion than in the first quarter, while Agricultural Bank and Bank of China reported slower growth. Bank of Communications Co. had no change.
China’s banks are selling bonds and subordinated securities to boost capital. Construction Bank’s board approved the sale of as much as 38 billion yuan of so-called Tier 2 securities to replenish capital before the end of next year.
Construction Bank’s interest margin was 2.80 percent at the end of June compared with 2.81 percent at the end of March, the lender said.