The Agricultural Bank of China (ABC), the country's third largest lender, said that it can control the financial risks associated with non-performing loans (NPLs) but cautioned that its net interest margin (NIM) level, which measures the bank's profitability, may narrow due to fierce market competition in the second half of 2012.

The bank said that its balance of NPLs dropped by 2.85 billion yuan ($448.72 million) in the first half of 2012 from the end of 2011. In the same period, the NPL ratio was also 0.16 percentage point lower to 1.39 percent from the 1.55 percent recorded at the end of last year.

"The bank's NPLs do indeed rise in some specific business sectors and in those companies located in the Yangtze economic region. This is due to the specific economic and industry factors concerning some industries and the Yangtze economic region," ABC Vice-Chairman and President Zhang Yun said at a press conference on Wednesday in Hong Kong.

"Chinese banks face the pressure of a bad loan rebound but ABC can prudently manage such risks," Zhang added.

"Agricultural Bank is among banks that have foreseen a rebound of bad loans this year so they've made adequate provisions since late last year," said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp. "That enabled them to manage the provisions this year to smoothen out their earnings."

However, Zhang was worried that the NIM level may shrink in the second half of 2012. Net interest margin clocked in at 2.85 percent against 2.79 percent from a year ago.

"The bank's margin squeeze may happen in the second half as the economy continues to face uncertainty. Moreover, as the country embarked on interest rate liberalisation, it will further narrow the NIM level," Zhang said.

However, Zhang was confident that ABC can maintain its current NIM level as the bank can price its loan products at a better rate while prudently managing its liabilities.

ABC said it made a net profit of 80.52 billion yuan in the January-June period, up 20.8 percent from the 66.68 billion yuan it recorded in the year-ago period, in line with the market expectation. However, its profit growth is also the smallest first-half profit rise since going public in 2010.

"At present, the banking industry in China is facing complex and challenging internal and external situations," ABC Chairman Jiang Chaoliang said in a statement posted on the Hong Kong bourse.

"We had expected ABC to deliver something better than this on hopes of getting more profit support from the rural business and better management of margins," said Masterlink's Yuan. "As with everybody else, the outlook on asset quality is quite worrisome."

"Investors are deterred by its low core capital adequacy ratio and some other historical problems such as poor asset quality and weak internal controls," Tang Hui, a Beijing-based analyst at Founder Securities Co. The bank's core capital adequacy ratio rose to 9.65 percent as at June 30, just exceeding the 9.5 percent minimum imposed by the China Banking Regulatory Commission on important banks under a rule to be phased in next year.

ABC's share price declined 1 percent in Hong Kong on Wednesday's trading, extending this year's drop to 11 percent and making it the worst performer among the five largest mainland lenders.

Reuters and Bloomberg contributed to this story

oswald@chinadailyhk.com

(HK Edition 08/30/2012 page2)