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Merchants Bank profit jumps 81% on tax credit

(Bloomberg)
Updated: 2007-04-17 10:14

Widening Margin

The bank's net interest margin widened to 2.72 percent from 2.69 percent. Rates for loans with a longer maturity were lifted by a larger amount. Merchants Bank benefited as its longer-term loans are larger than its deposits that mature at the same time.

Profit also gained as Merchants Bank paid 905 million yuan less in tax for 2006 than previously expected after being granted pretax deductions for staff costs. The effective tax rate dropped to 33 percent from 42 percent a year earlier.

Shares of Merchants Bank have surged 80 percent in Hong Kong since it raised $2.4 billion in a stock sale in September. It is the most expensive Chinese banking stock in Hong Kong, trading at 4.5 times estimated 2007 book value, compared with 2.58 times for Industrial & CommercialBank of ChinaLtd., 2.2 times for Bank of China Ltd. and 3.1 times for Bank of Communications Ltd.

"The high valuation will be diluted" after more banks, includingShanghaiPudong Development Bank Co. and China Minsheng Banking Corp. complete stock sales in Hong Kong later this year, said Sandy Hu, a Hong Kong-based bank analyst at Deutsche Bank AG, who has a "sell" rating on the stock.

Merchants Bank, established in 1987, was the first to offer Web banking that allows instant domestic remittance and bill payment. The bank, with a third of the dual-currency credit card market, issued 5.17 million such cards last year, taking the outstanding number to 10.3 million as of Dec. 31, according to the statement. Bank card fees surged 76 percent to 1 billion yuan in 2006.

"Its brand image is very well established and the most powerful in the credit card sector," said Ken Su, a Hong Kong- based analyst at KGI Securities Co. He expects the bank to double the total number of credit cards in 2007.

Its bad loan ratio stood at 2.21 percent as of Dec. 31, while the capital adequacy ratio, a key measure of the bank's financial strength, rose to 11.4 percent.