Chinese banks post sharp increases in profits
Chinese banks have posted strong results for the first quarter of 2008, helped by robust lending, strong growth of wealth management products and a cut in the corporate tax rate from 33% to 25% in January 2008.Net profit rose 157% at China Merchants Bank and 77% at the Industrial and Commercial Bank of China (ICBC) in the first three months of the year. China Construction Bank reported profit of RMB 32.1bn, almost the same amount that the bank booked for the first six months of last year.
Charlie Awdry, Manager of Gartmore's award-winning China Opportunities Fund, believes that these results reflect the progress of the economic reform process within the sector. "Chinese banks have been recapitalised, with many raising funds via Hong Kong. Some have seen the arrival of strategic investors with specialist management and risk-control expertise. At the same time, the opportunities for banks to lend increased again in the first quarter as the government loosened controls on lending after severe winter weather."
Chinese banks receive annual lending quotas from the People's Bank of China (PBOC), and typically lend around one third of the allocated amount in the first quarter. Due to winter storms, banks were encouraged to allocate around 35% in the first three months of the year. By lending more in Q1, banks will be able to generate more interest income over the year as a whole.
The banks themselves recognise that profit growth is likely to moderate in 2008. Inflation has moved higher, which is expected to result in further monetary tightening. This could feed into lower interest income later in the year. These are features that Gartmore's team will be monitoring in 2008.
Gartmore's China Opportunities Fund has overweight positions in selected commercial banks, including China Merchants Bank, ICBC and China Construction Bank, all of which contributed to Fund returns in the month to March 2008.
The Gartmore China Opportunities Fund has recently been awarded an OBSR A Rating.