Shrinking profitability didn't stop China's top three state-controlled banks from going on a lending spree in the first three months of 2009. The result was dismal first quarter profit in those banks.

Industrial and Commercial Bank of China (ICBC), the world's largest bank by market value, was the only one of the three able to post net profit growth in the first quarter. Its net profit grew 6.16 percent from a year earlier to 35.2 billion yuan in first quarter.

The other two state-controlled banks, China Construction Bank (CCB) and Bank of China (BOC), reported an 18.22 percent and 14.41 percent first-quarter net profit drop, respectively, from the previous year.

Net interest income in the top three banks, their main source of income, plunged despite the banks' record-setting lending surge in the first quarter.

ICBC said in its first quarter earnings report that its net interest income in the first quarter fell to 57.7 billion yuan, down 12.88 percent from a year earlier. If not for a 9.66 percent increase in its net fee and commission income and a 3.2 percent drop in its operating expenses, ICBC's profit growth would also have been down in the first quarter.

First-quarter net interest income in CCB and BOC also fell 6.55 percent and 9.74 percent, respectively, from the previous year.

Net interest income accounted for 79.5 percent of ICBC's total operating income in the first quarter, 77.5 percent of CCB's and 73 percent of BOC's.

Chinese banks extended a record 4.58 trillion yuan in new loans in the first quarter, after the government urged domestic banks to boost lending to help China's economy recover.

ICBC's new loans in the first quarter rose 14 percent from a year earlier to 636.4 billion yuan, an amount greater than the annual gross domestic product of Vietnam. CCB and BOC also each extended more than 500 billion yuan in new loans in the first three months.

Narrowing interest margins were the factor preventing the top three banks from generating more profit.

Net interest margin at CCB and BOC fell 68 basis points and 63 basis points, respectively, in the first quarter from the same period in 2008. ICBC did not disclose specific interest margin figures in its first quarter earnings report. A basis point is 0.01 percentage point.

The top three banks' return on average equity, a key indicator of a bank's profitability, also tumbled in the first quarter.

ICBC's return on average equity in the first quarter fell 0.32 percentage points from a year earlier, CCB's dropped 7.49 percentage points and BOC's went down 4.46 percentage points.

Officials from both the People's Bank of China and the China Banking Regulatory Commission reiterated earlier this month that the government has no plan to slow the recent lending surge in domestic banks.

This means Chinese banks, led by the top three state-controlled banks, will likely continue to extend more new loans this year, analysts said.

Bank lending in China this year may top the 5 trillion yuan government target by as much as 3 trillion yuan, according to JPMorgan Chase. Stephen Green, head of China research at Standard Chartered Bank, predicted that the total amount of new loans in 2009 could be as high as 9 trillion yuan.

Sarah Wu, a banking analyst from Macquarie Securities, forecasted net profit growth in China's top three state-controlled banks to be less than 1.5 percent in 2009.

(Xinhua News Agency May 4, 2009)