HONG KONG: China Construction Bank, the world's No. 2 bank by market capitalization, reported on Sunday a 31 percent rise in first-half earnings as strong growth in its financial advisory services helped boost earnings. CCB said it made a net profit of 92.8 billion yuan in January-June, better than market expectations for a 92.3 billion yuan net profit and higher than the 70.7 billion yuan it made a year ago. "China's economy is expected to maintain steady growth, but the growth rate is likely to slow," CCB said in a statement posted on the Hong Kong stock exchange. "While the risk of inflation seems to be controllable, the task of economic structural adjustment and transformation of development patterns remains arduous." It also said it was strictly controlling loans granted to local government financing vehicles (LGFV), but did not give exact numbers. Such loans have been singled out by China's banking regulators as a possible hot spot that could lead to a spike in bad loans. "Loans to local government financing vehicles are still the biggest worry right now," said Sheng Nan, a Shanghai-based analyst with UOB-Kay Hian. "It has the potential to be very serious, and we will be asking for more details on this." Local governments are banned from borrowing directly from banks, and so many of them set up financing vehicles which take loans to fund infrastructure projects. These vehicles have chalked up an estimated 10.7 trillion yuan ($1.68 trillion) of loans as of end-2010, according to China's state auditor. The bank is also China's biggest mortgage lender and most exposed to the country's red-hot real estate sector, with investors pushing its shares down by over a fifth in the past three months as worries about a property bubble grow. Bank of America Corp owns about 10 percent of CCB's Hong Kong-listed shares and has held exploratory talks with the principal investment funds of Kuwait and Qatar about selling part of the stake, sources have said. Non-performing loans stood at 1.03 percent, down from 1.09 percent at the end of the first quarter. Concern has been growing that NPLs may spike if there is an economic slowdown, as many banks extended huge loans to kickstart the economy during the global financial crisis of 2008. Net interest margin, which measures loan profitability, narrowed to 2.66 percent from 2.69 percent at the end of the first quarter. Total net loans and advances hit 5.99 trillion yuan, up 8 percent from the 5.53 trillion yuan loan book it recorded at the end of December 2010. Banks in China have been under pressure to control lending, and rivals such as Industrial and Commercial Bank of China have already announced lower lending targets this year. Helping boost earnings was fee and commission income, which rose 41 percent from a year ago to 47.7 billion yuan. CCB has an investment banking and securities arm CCB International, which is based out of Hong Kong. However, some analysts have questioned if such rapid growth is sustainable in the rest of the year, with banking regulators looking more closely at wealth management products. "We believe some of the fee growth actually represents cannibalization of spread income," UBS analyst Sarah Wu wrote in a note before the earnings. "The recent regulatory warning on wealth management products could slow issuance volumes in H2." CCB shares have fallen by almost a quarter in the past 3 months, lagging the 15 percent decline during the same period on the benchmark Hang Seng Index .
