By Kelvin Soh and Terril Yue Jones
HONG KONG/BEIJING (Reuters) - Industrial and Commercial Bank of China <1398.HK> and Agricultural Bank of China Ltd <1288.HK>, the country's No.1 and No. 3 lenders by market value, reported record half-year profits on Thursday, driven by better pricing power for loans and rising fee income.
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ICBC <601398.SS> and AgBank <601288.SS> join second-largest China Construction Bank <0939.HK> and fourth-largest Bank of China <3988.HK> in unveiling record half-year profits, benefiting from the mainland's moves to raise interest rates as well as strong demand for wealth management products.
China has been trying to pull back on bank lending by steadily raising interest rates and ordering banks to keep more reserves with the central bank, to keep inflation under control. Rising rates have improved the margins of banks.
"A stable monetary policy will continue to tighten market liquidity and improve commercial banks' bargaining power," ICBC said in a statement.
At the same time, given the slowing credit environment, banks have cut their reliance on lending activities and boosted revenues from businesses such as wealth management, investment banking and credit cards.
The major banks, which are government-controlled, have also reported a drop in non-performing loans. There were heightened concerns 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 particular concern was loans extended to many struggling local government financing vehicles, but the banks have said a majority of those are backed up by cash flows or provisions.
ICBC PROFIT UP 29 PCT
ICBC, in which Goldman Sachs <GS.N> and American Express <AXP.N> hold stakes, reported January-June net profit of 109.5 billion yuan ($17.14 billion), slightly better than analysts' expectations for 106.9 billion yuan, according to a Reuters survey of nine analysts.
It was also 29.4 percent higher than the 84.6 billion yuan it made the same period last year.
Net interest margin, which measures the profitability of loans, widened to 2.6 percent from 2.44 percent at the end of 2010. Non-performing loans stood at 0.95 percent, down from 1.08 percent at the end of 2010.
Helping boost earnings was fee and commission income, which rose 46 percent to 56.8 billion yuan from a year ago. ICBC's investment banking arm is Hong Kong-based ICBC International, which has snagged several high-profile deals.
AgBank recorded a 66.67 billion yuan profit for January-June, up from 45.8 billion yuan a year earlier. The result was roughly in line an with the average estimate of 67 billion yuan from nine analysts surveyed by Reuters.
Net interest income for the quarter was 144.7 billion yuan, up 29 percent from a year earlier. Net interest margin was 2.79 percent versus 2.47 percent in the first half of last year. Its non-performing loan ratio stood at 1.67 percent, compared with 2.03 percent a year earlier.
ICBC shares in Hong Kong ended up 1.9 percent on Thursday, compared with the benchmark Hang Seng Index's <.HSI> 1.5 percent gain. AgBank shares closed up 0.3 percent.
($1 = 6.388 Chinese Yuan)
(Writing by Muralikumar Anantharaman; Editing by Anshuman Daga)