China Merchant Bank (CMB), the country's most profitable lender, said its non-performing loan ratio had dropped, dismissing rumors that it is suffering losses from loan defaulters in Shenzhen as the city's property market plunged significantly.

Ma Weihua, president, said at a telephone conference yesterday that the bank has not recorded any impaired loan from customers investing in Shenzhen property market. "Instead, the loan businesses in Shenzhen have improved," he said.

Last month several local media reported that a growing number of home buyers in Shenzhen could not repay their mortgage loans as the city's property price dropped about 40 percent in the first half this year.

"The reports are exaggerating," said Ma, "the case is not that bad."

CMB, China's sixth-largest lender by asset, said its non-performing loan ratio fell to 1.25 percent in late June from 1.42 percent at the end of March, and its capital-adequacy ratio dropped to 10.41 percent from 10.79 percent.

Daniel Chan, a senior investment strategist at DBS Bank, said the economic environment in the second half of 2008 and next year will affect CMB's fast-growing momentum.

"The impressive growth may not be seen next year, or the second half. The economic environment does not favor the lender," he said.

Chan expects CMB, like other banks in China, will see its asset quality deteriorate as property firms are hit by the central government's clampdown on borrowing and exporters are squeezed by a weakening global economy.

The Shenzhen-based lender posted 13.25 billion yuan in net profits in the first half of 2008, compared with 6.12 billion yuan in the same period in 2007.

Net interest margins, the measure of a bank's profitability, widened to 3.66 percent at the end of June compared with 3.11 percent at the end of December, due to stronger pricing power.

The bank's net fee and commission income jumped 53.7 percent to 4.1 billion yuan in the first six-month this year, which accounted for 14 percent of operating net income, lifted by strong bank card fees, agency services fees and commissions.

Total outstanding loans amounted to 742.7 billion yuan during the period, representing an increase of 10 percent from the end of 2007.

CMB is the first Chinese bank to disclose its exposure to US mortgage giants Freddie Mac and Fannie Mae.

As of the end of June, the bank held a total of $180 million of debt issued by the troubled US firms. Of the total, $110 million was from Fannie and $70 million from Freddie, the bank said.

(HK Edition 08/20/2008 page2)