Top listed China bank's Q2 slows but loans climbing

SHANGHAI, Aug 16 (Reuters) - Merchants Bank Co. Ltd., China's top domestically listed lender, is expected to post its slowest quarterly earnings growth in two years after tackling nationwide lending curbs and its own swelling pool of sour debt.

But its loans expansion might have re-accelerated in the latter half of 2005 -- boding well for net profit -- as Beijing urges its banks from behind the scenes to lend more in an effort to combat an anticipated economic growth slowdown, analysts say.

From April to June, net profit is expected to rise by a tenth to 878.7 million yuan ($108.5 million), according to the average of a Reuters poll of four analysts -- its slowest growth in 8 quarters and well off a 60 percent rise in 2004's second quarter.

Merchants Bank's president warned in May of rising bad debt and decelerating loans growth, adding that if 2005 profits rose less than 20 percent the company would forego a planned overseas share listing.

Full-year net profit is forecast to rise 24 percent to 3.89 billion yuan, according to 6 brokerages surveyed by Reuters Estimates.

The tribulations of the bank -- based in the southern boomtown of Shenzhen and backed by the ports-to-roads China Merchants Group -- mirror those of an industry hit by nationwide economic cooling measures that took hold in April 2004.

Analysts say the situation may not improve until later this year or early 2006, when the first of the Big Four state banks list. That might prompt regulators to let domestically listed banks return to markets and boost capital adequacy ratios.

"The joint stock banks are suffering from severe capital problems now," said BOC International analyst Anthony Lok, who has an "outperform" rating on Merchants. "Technically, it's very hard for them to grow their loan books."

Indeed, rivals from Pudong Development Bank -- in which Citigroup Inc. owns almost 5 percent -- to Minsheng Banking Corp. , nearly 5 percent-owned by Singapore's Temasek Holdings [TEM.UL], could fare worse.

Merchants Bank's top 10 clients are mainly transport or energy-related companies: from coal giant Shenhua Group to China Ocean Shipping Co, the country's largest shipper, sectors which have largely escaped the government's credit tightening.

"Their exposure is much less than for other banks, and they have better risk controls," said Wu Yonggang at Guotai Junan Securities.

LOOMING PILE OF NPLS

Merchants Bank took on additional non-performing loans of 800 million yuan from January to April, President Ma Weihua said in a speech to management.

That highlighted a looming concern for China's banks, considered one of the weakest links in the world's seventh largest economy: that Beijing's efforts to slow its economy would foment a fresh round of bad-debt accumulation.

Merchants carried 11 billion yuan of bad debt at the end of March, or 2.7 percent of total loans, according to its first quarter earnings report.

Now, economists say the central bank is quietly spurring credit to cushion the impact of an anticipated economic slowdown.

In June, banks made 465.3 billion yuan in new yuan loans, up from 108 billion yuan in May and 142 billion yuan in April.

Second-quarter economic growth was a robust 9.5 percent, but falling inflation and easing corporate profits have fuelled expectations of a second-half slowdown. The latest Reuters poll forecast China's GDP growth at 9.2 percent this year.

"Certainly, it seems likely there will be a relaxation of monetary policy in the second half, which should help loans growth," Wu said.

Merchants will be the first Chinese listed bank to report earnings later this week, expected on Friday.

Others to follow include Pudong, Shenzhen Development Bank -- controlled by Newbridge Capital -- and Hong Kong-listed Bank of Communications , one-fifth owned by HSBC Holdings Plc. .

Merchants' shares rose 5 percent in the second quarter, outperforming the market's 8.5 percent dive, but underperforming Pudong Bank's 10.6 percent rise. Minsheng gained 5.3 percent.

(Additional reporting by Fang Yan) ($1=8.098 yuan)