(Adds background on credit cards, BoCom executive comment on fourth-quarter loan growth.)
SHANGHAI -(Dow Jones)- Bank of Communications Co. (3328.HK) Wednesday posted a 1.5% rise in third-quarter net profit on a slight improvement in interest margins, adding it plans to set up a joint venture with HSBC Holdings PLC (HBC) to offer credit cards in China.
The planned joint venture between China's fifth-largest lender by assets and HSBC will help the U.K. banking giant tap a promising credit card market in China, where only one in every 10 people has a card.
Bank of Communications, or BoCom, intends to pay 2 billion yuan ($293 million) for an 80% stake in the new company, while HSBC will spend CNY1.2 billion for an 20% interest.
Foreign banks have been allowed to issue cards in China since 2004 in conjunction with their local partners. Foreign-Sino banking partners such as Citigroup Inc. and Shanghai Pudong Development Bank Co., and HSBC and BoCom, are issuing co-branded cards in China.
Credit cards weren't popular in China until this century, but the number of cards issued in the country has grown exponentially since then. The number of China-issued credit cards surged to 142 million at the end of last year from fewer than 50 million at the end of 2006, central bank data show.
"The joint venture will tap a market which is expected to see exponential growth in the coming years," HSBC said in a statement. The joint venture will extend an existing co-operation agreement between HSBC and BoCom's Pacific Credit Card unit, which has issued more than 11 million cards. HSBC and BoCom reached the agreement in 2004 following the U.K. lender's acquisition of a 19% stake in BoCom. Qian Wenhui, an executive vice president of BoCom, said China's banking regulator has given initial approval for the credit card joint venture.
BoCom's third-quarter net profit rose 1.5% to CNY7.32 billion from CNY7.21 billion a year earlier.
The bank attributed the increase to an improvement in its net interest margin, which was 2.22% at the end of September, up one basis point from 2.21% at the end of June. BoCom issued CNY77 billion worth of new loans in the third quarter, compared with the CNY54 billion it extended in the same period a year earlier.
However, its lending slowed significantly from the explosive growth in the first half, when the bank's new loans totaled CNY400 billion as state-owned banks were enlisted to help finance Beijing's CNY4 trillion economic stimulus program.
Qian said the bank's new lending in the fourth quarter will likely be similar to third-quarter levels.
"The structure of the new loans has improved as we are rolling over low-yielding discounted bills into long term loans. The trend will continue in the fourth quarter," said Qian.
"The new loans we will issue in the last quarter of this year are expected to be equivalent to the third quarter," he added.
As of Sept. 30, the bank's capital adequacy ratio was 12.52%, down from 13.47% at the end of 2008. Its impaired loan ratio fell to 1.44%, from 1.92%.
Bank of Communications has more than 2,700 branches and outlets across 137 of the wealthiest cities in mainland China.
It has been expanding its operations to include asset management, trust and financial leasing. Last month, Chinese banking and insurance regulators approved the bank's plan to buy a 51% stake in China Life-CMG Life Assurance Co., a joint venture between China Life Insurance (Group) Co. and Commonwealth Bank of Australia.
-Rose Yu in Shanghai and Aries Poon in Hong Kong contributed to this article, Dow Jones Newswires; 8621 6120-1200; rose.yu@dowjones.com