Bank of China

Chinese banks are kicking off the reporting season in old-fashioned style: with profits, growth and a long list of awards. But the writing is on the wall, as demonstrated by Tuesday's results from Bank of China, the world's third biggest lender by market value and winner of, among other honours, best care for children institution.

While net profits rose 14 per cent to $9.4bn on a year-on-year basis, fourth quarter income was one-third that of the previous quarter. Even on an annual basis growth evaporated at the pre-tax level, illustrating the fillip provided by lower taxes. Banking in China is relatively simple stuff: about four-fifths of revenues come from lending money at mostly government-set rates. Beijing is firmly in stimulus mode and banks are rallying to the cause, increasing year-on-year lending in excess of 20 per cent in January and February. But volume gains are partially offset by margin contraction, the result of lower interest rates and savers switching into higher-yielding time deposits. Bank of China's net interest margin dropped 13 basis points to 2.63 per cent. And more loans are turning bad; credit costs doubled to $2.5bn. Since almost one quarter of the group's loan book is to the struggling manufacturing sector, and almost one-third of loans are unsecured, there is plenty of scope for that number to increase again this year.

So much for the home turf: Bank of China's woes are heightened by its role as the country's most externally focused lender. That gives it a relatively large foreign currency book and exposure to structured products – and explains the $4bn impairment losses on “other assets”. The carrying value of remaining subprime and other discredited US assets is $16.3bn. This feature largely explains Bank of China's 30-40 per cent discount to its peers: the Hong Kong listed shares trade just above book. The bank is as safe as houses compared with its wobbly western peers, but its heyday is over.