Bank of China profit soars 85 per-cent in first quarter

Bank of China said Monday that first-quarter profit had surged 85% as loan growth and lower taxes outweighed $203 million in losses on investments linked to U.S. subprime mortgages.

Net income increased to 21.7 billion yuan, or $3.1 billion, from 11.7 billion yuan a year earlier, the bank, based in Beijing, said in a statement to the Hong Kong stock exchange. Bank of China reduced holdings of subprime-related securities to $4.4 billion at March 31 from $4.99 billion three months earlier.

Bank of China climbed 2.9% in German trading after the announcement on optimism that the worst of the mortgage market shakeout that led to $1.5 billion of investment losses since July has passed.

"Concern over Bank of China's subprime exposure is easing as investors get a fuller picture of its holdings," said Wang Jinsong, a fund manager at Galaxy Asset Management in Shanghai.

Bank of China paid 7 billion yuan in taxes in the first quarter, 40% less than a year earlier. The government unified corporate income tax rates for domestic and foreign firms beginning on Jan. 1, cutting the tax rate for Chinese companies to 25% from an original 33%.

China's economy has expanded at rates of more than 10% for nine straight quarters, driving consumer and corporate demand for loans and other financial services like asset management. The central bank raised interest rates six times last year, widening the gap between lending and deposit rates.

Bank of China offered 226 billion yuan of new loans in the first three months, taking the outstanding amount to 2.98 trillion yuan. Net interest income rose 19% to 40.8 billion yuan from 34.4 billion yuan a year earlier.

Net fees and commission income grew 83% to 9.5 billion yuan from 5.2 billion yuan a year earlier, the statement said.

The government is clamping down on loan growth after China's cabinet identified overheating and inflation as two major risks facing the economy this year. The People's Bank of China has raised the proportion of deposits that lenders must set aside as reserves three times this year to a record 16%.

Domestic banks increased lending 14.8% in the first quarter, down from a growth rate of 16.3% a year earlier. The industry's total new lending for this year will be capped at the 2007 amount, the banking regulator said.

Banks have sustained their profit growth so far after posting record earnings in 2007. China Merchants Bank, China Minsheng Banking and Industrial Bank all said last week that profit more than doubled in the first quarter.

"The biggest uncertainty for Bank of China and all the other Chinese banks remains: To what extent will the economic slowdown hurt the banks' profit and asset quality?" said Galaxy's Wan.

Bank of China's Shanghai shares closed 1.8% lower Monday, before the results were announced. Its Hong Kong shares rose 0.5%.

BOC Hong Kong, a Bank of China unit, also reported results Monday and said that first-quarter operating profit rose 28% to 5.26 billion Hong Kong dollars, or $675 million, on higher interest income, fees and commissions.

The bank, Hong Kong's biggest publicly traded lender by assets, said it more than halved the value of its securities that are backed by U.S. subprime mortgages to 2 billion dollars as of March 31, from 4.1 billion dollars three months earlier. It made a provision of 555 million dollars for writing down the assets. (Reuters)