China Construction Bank Corp., the world’s second-largest lender by market value, fell the most in more than four months in Hong Kong after posting profit that missed some analysts’ estimates because of rising provisions.

The shares fell as much as 3 percent, after Beijing-based Construction Bank said yesterday net income rose 26 percent last year to 134.8 billion yuan ($20.6 billion). That was less than the 139 billion yuan average of 17 estimates compiled by Bloomberg.

Construction Bank, established in 1954 to fund roads, bridges, dams and other public works, recorded 4 billion yuan of provisions on equity investments and off balance-sheet assets. The lender also said non-performing loans for infrastructure projects increased, fueling concern that a two-year lending boom that started late 2008 will hurt asset quality.

“The market is concerned about asset quality,” said James Liu, a Hong Kong-based analyst at CIMB-GK Securities who cut his rating on Construction Bank to “neutral” from “outperform” after the earnings report.

Construction Bank has a higher ratio of infrastructure related loans than most of its biggest rivals, the companies’ financial statements show. China’s central bank has raised interest rates three times since October and property sales taxes have been introduced in fast-growing markets as the government sought to prevent a real estate bubble.
Bad-Loan Rebound

The lender, part-owned by Bank of America Corp., set aside 29.3 billion yuan in provisions against bad debts last year, up from 25.5 billion yuan in 2009. That boosted provisions to 2.52 percent of total loans, above the new 2.5 percent minimum imposed by the government.  Construction Bank said infrastructure-related bad loans rose “slightly” from 2009, without giving more details.

Moody’s Investors Service said today rising inflationary risks will lead to faster interest rate increases and cause a rebound in bad loans, which have been falling for a decade. The ratings company maintained its “stable” outlook for the industry over the next 12 to 18 months.

“While we expect rising bank non-performing loans -- which typically follow in the wake of very strong loan growth -- robust earnings, significant loan loss reserves, and additional capital raised from the capital markets will help the banks to tackle asset quality challenges,” Beijing-based Moody’s analyst Yvonne Zhang wrote in a report today.

China’s five largest banks raised a combined $56 billion selling shares and convertible bonds in the past year.
‘Prudent and Proactive’

Rivals Bank of China Ltd. and China Minsheng Banking Corp. last week reported stronger-than-expected profit growth as demand for consumer and corporate loans climbed in an economy that overtook Japan last year as the world’s second largest.

Bank of China, the nation’s third-largest by market value, on March 24 reported a 29 percent increase in 2010 profit to 104.4 billion yuan, 5.5 percent above the consensus estimate. Minsheng Bank said on March 25 net income rose 45 percent to 17.6 billion yuan, 11 percent higher than analyst estimate. Minsheng today gained 1.1 percent in Hong Kong to HK$7.14 and Bank of China added 0.5 percent to HK$4.29.

Construction Bank’s “prudent and proactive” provision charge will help it to deliver stable credit cost, according to Macquarie Capital Securities Ltd. Interest Margin The lender’s fourth-quarter net income rose 18 percent to 24.35 billion yuan, based on subtracting nine-month profit from full-year earnings.

“Strong demand for loans and rising pricing power are still the dominant factors driving banks’ profit growth,” Wu Xiaoling, a Shenzhen-based analyst at Great Wall Securities Co., said. “A rebound in bad loans is a valid and long-term concern, but that’s not likely to depress earnings anytime soon.”

The value of loans outstanding at the state-controlled lender stood at 5.53 trillion yuan at the end of December, an increase of 17.8 percent from the beginning of the year, according to yesterday’s statement. That’s slower than 2009’s expansion of 27 percent. The bank said it expects yuan- denominated credit to grow 13 percent this year.

Net interest income, or revenue from borrowers minus interest paid to depositors, gained 19 percent to 251.5 billion yuan last year as the net interest margin widened to 2.49 percent from 2.41 percent. Income from fee-based services jumped 38 percent to 66.1 billion yuan.
Down Payment

The bank said yesterday its loans to the real-estate industry climbed 12.3 percent last year, slower than the 18.7 percent growth in overall corporate loans, and accounted for 7.1 percent of total lending at the end of 2010.

China in January increased the minimum down payment for second-home purchases, told local governments to set price targets on new properties and introduced taxes for homes in Shanghai and Chongqing.

The country’s real estate market has defied the restrictions, with the average price of homes rising 26 percent in the first two months of this year, according to China’s statistics bureau. Construction Bank’s capital adequacy ratio rose to 12.68 percent as of Dec. 31 from 11.64 percent three months earlier after it completed a $9.2 billion rights offer in December.