HONG KONG: Bank of Communications (BoCom) said it will form a credit card joint venture with HSBC with registered capital of 2.5 billion yuan ($366 million) to tap the growing affluent consumer market in China.

Upon its establishment, 80% of the equity interest in the credit card company will be owned by BoCom and 20% by HSBC, which owns about one fifth of BoCom. The two banks have already cooperated for years, with HSBC sending both management and operational staff to work with BoCom.

The joint venture announcement came as BoCom posted an almost flat quarterly net profit as lower margins offset the benefit of loan expansion, but analysts expect profitability to improve as the economy recovers.

BoCom earned 7.32 billion yuan ($1.07 billion) in the quarter ended September 30, which is roughly a 1.5 percent increase from a net profit of 7.2 billion yuan a year earlier.

The government is unlikely to change the nation's expansionary fiscal and monetary policy in the near term on concern the economy's foundation isn't sufficiently solid, BoCom Vice President Qian Wenhui said in Shanghai yesterday. The bank will take measures to prepare for an interest rate increase next year, he said.

New loans in the fourth quarter will stay at the same level as the third quarter, Qian said.

BoCom and other Chinese lenders have been suffering from shrinking margins following five interest rate cuts since last September as the government spurred lending to sustain growth amid the global economic crisis.

Banks' net interest margins had narrowed to about 200 basis points on average compared with more than 300 basis points last year, said Jin Lin, an analyst at Oriental Securities Co. (A basis point is 1/100 of a percentage point.)

The margin pressure has begun to ease as Beijing tightens its ultra-loose monetary policy, but loan growth has also slowed sharply in the second half of the year.

"BoCom's numbers don't look so good, if you compare them with its peers," said Ivan Li, an analyst at Kim Eng Hong Kong. "I'm positive about China's banking sector, based on a few factors, including rebounding net interest margin, improving marcoeconomic conditions, and smaller-than-expected bad debt provision."

The results lagged behind expectations of an analysts' poll by Reuters, who had forecast a third-quarter profit of 7.55 billion yuan on average.

"Despite rapid loan growth, profit was dented by narrowing margins," said Oriental Securities' Jin before the results came out. "But interest margins have bottomed out and will likely rise if the government tightens monetary policies."

Analysts are worried not only about tight interest margins, but also about asset quality after China's major banks embarked on a lending spree this year to support the government's 4 trillion yuan infrastructure-focused stimulus.

BoCom shares rose 8.6 percent in Hong Kong during the quarter, underperforming a 14-percent gain in the benchmark Hang Seng index.

Loans outstanding increased by 2.3 percent to 1.77 trillion yuan, from 1.73 trillion yuan at the end of June. The growth rate was down sharply from the 30 percent growth rate in BoComm's total outstanding loans in the first half of the year.

Its net interest margin fell to 2.22 percent from 3.02 percent at the end of 2008, but up slightly from 2.21 percent in the previous quarter.

BoCom's results were similar to those of China Construction Bank, China's second-biggest lender, which reported earlier in the week that lending growth slowed sharply in the third quarter as net interest margins showed signs of stabilizing.

BoComm's shares fell 2.11 percent to HK$10.20 in Hong Kong yesterday before the company released its results.

China Daily/Agencies

(HK Edition 10/29/2009 page4)