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Bad debts still mount at China's big four banks

Aggregate loan-loss allowance up 7% as soured loans top $118bn

Agricultural Bank of China, one of the top four Chinese banks, saw its nonperforming loan ratio decline from a year ago but the volume increased. (Photo by Kenji Kawase)

HONG KONG -- China's four biggest commercial banks, which reported higher first half net profits and lower non-performing loan ratios, have also been plowing record sums into resolving bad debts on their books, which were still mounting in absolute terms.

The aggregate volume of impaired loans of the four state-owned banks -- Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), and Bank of China (BOC) -- stood at 781.28 billion yuan ($118.43 billion) at the end of June, up 4.6% from a year ago. The ratio of impaired loans to their combined total loan balance was 1.66%, down 10 basis points from a year earlier.

The lenders generally attributed the decline in NPL ratios to enhanced resolution of bad debts through efforts such as asset disposals, loan restructuring, securitization and debt-for-equity swaps. About 1.26 trillion yuan of provision was set aside as of June, up 7% from the same period last year, of which around 10% were write-offs and transfer-outs.

Such costs capped recovery of the bank's bottom lines, which rose 4.5% on the year to 503.62 billion yuan for the six months ended in June.

"As long as our profitability allows, we would continue to load up our loan-loss reserve so as to cushion expected losses," CCB president Wang Zuji told reporters on Thursday. While emphasizing "the worst has gone" for the bank's debt situation, Wang said CCB would not pursue "an absolute reduction" of NPLs at the expense of "serving the real economy." This latter aim was championed by Chinese President Xi Jinping at the twice-a-decade National Financial Work Conference in July.

"We just have to make sure that the risk factors are well within expectation, as well as having rigorous solutions in hands to contain foreseeable risks," said Wang. The bank had resolved 18.9 billion yuan of bad loans through securitization as of June, and entered into agreement with over 40 companies for swapping their debts into equity worth a total 500 billion yuan.

ICBC, the largest among the four lenders by assets, was the only bank that saw its allowance for NPLs running below the regulatory requirement of 150%, at 145.81% as of June, as its total soured loan balance rose 11% on the year to 217.07 billion yuan. "A strong ability to resolve [bad loans] is of paramount importance to maintaining good asset quality," said ICBC president Gu Shu in a conference call on Wednesday.

He noted that the bank could only achieve an NPL ratio of 1.55%, down 5 basis points from December, through tapping its huge reserve of provisions, which rose over 12% on the year to 316.5 billion yuan. "We had disposed of 91.1 billion yuan of bad debts so far this year, of which 47.3% was cash recovery," said Gu, adding that over 200 billion yuan of bad assets had been charged-off through running down the bank's reserve in the past three years.

Better asset quality

But he was confident that better asset quality was on the horizon due to improved economic conditions. Apart from striking debt-for-equity deals with 16 enterprises, involving an amount close to 200 billion yuan, ICBC also grew its off-balance sheet assets by 12% from six months ago to 1.94 trillion yuan.

Attending to more rural customers, ABC also pushed up its loan-loss coverage, which rose 4% on the year to 415.28 billion yuan, the highest among its rivals. ABC's chief risk officer Li Zhicheng said at a Wednesday briefing that the bank would try to dispose of more assets, especially through sales to third parties during the current good times, with the target of capping its NPL ratio at 2%.

The bank's bad debt volume, standing at 228.43 billion yuan as of June, was down 1% from six months ago, but up 1.35% compared to a year earlier. Apart from official channels, the bank is also looking to manage its loan book through selling more wealth management products -- an avenue that allows Chinese banks to bypass regulations when extending loans.

The balance of wealth management products issued by ABC reached 1.50 trillion yuan as of June, of which 43% was invested in debt securities and 19% in non-standard assets concentrated in infrastructure projects. ABC's vice president Kang Yi said the bank would continue to raise the proportion of non-standard assets until it reached the regulatory requirement of 35%.

BOC, the smallest among the four by assets, was alone in expressing concern over its debt situation. "The pressure to manage asset quality remains," said Pan Yuehan, chief risk officer. He noted there is still "uncertainty over global economic recovery," while supply-side reforms at home would exacerbate credit risks among excess-capacity sectors.

"The pressure for NPL formation is some regions is relatively huge," said Pan, referring to the BOC portfolio.

The bank registered the highest net profit growth among its peers, up 11.45% on the year to 103.69 billion yuan. It was the only one that managed to cut impairment charges in the first half, down 46% on the year to 26.96 billion yuan, while recording the lowest NPL ratio, at 1.38%, down 9 basis points from a year earlier. Growing its loan-loss reserve by just 1% to 224.16 billion yuan, it had resolved 73.5 billion yuan of bad debts in the first half.

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