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China's top 2 lenders see light at end of bad-loan tunnel

Yet coverage ratios and ROE dip further

CCB Chairman Wang Hongzhang, center, at a briefing in Hong Kong on March 30. (Photo by Yasuo Awai)

HONG KONG -- The two largest Chinese lenders barely grew net profit last year as the economy sputtered, with return on equity and assets sinking to new lows. But a better business climate this spring seems to have convinced management that their loan books, plagued in recent years by ballooning bad debts, may be on the mend.

"[Our] nonperforming-loan ratio had already hit bottom in 2015," China Construction Bank President Wang Hongzhang told reporters here Thursday. Of the 11.76 trillion yuan ($1.71 trillion) in loans extended to customers, 1.52% were nonperforming and 2.87% were classified as special mention, down 0.06 and 0.02 percentage point from a year earlier. CCB is the country's second-largest bank by assets.

The condition of nonperforming loans "will certainly keep improving," said Wang, who noted that Chinese businesses are now in better shape, while the bank is becoming more strategic in extending credit. "We have readjusted our loan structure rather drastically since 2015," he said, adding that CCB tends to target "large companies, sizable projects, big cities and high-end customers."

"Besides, our personal loans, which have a low nonperforming-loan ratio, grew very fast -- a lot faster than the average growth rate" of nonperforming loans, Wang said.

"Against such credit structure adjustment, there are just little catalysts to NPL formation," he said.

The corporate sector accounted for 82% of CCB's nonperforming loans last year. Manufacturing had the largest balance of nonperforming loans and an NPL ratio of 5.92%. Wholesale and retail trade had the second-most bad loans and a ratio of 9.01%, followed by mining, which had 5.1% of lending categorized as nonperforming.

Industrial and Commercial Bank of China, the largest of the top four commercial banks, feels similarly despite reporting higher bad-debt ratios for 2016. "There are signs that asset quality is stabilizing, if not picking up," ICBC Chairman Yi Huiman told reporters Thursday.

"We noticed positive changes on a quarterly basis last year," said Yi, who noted that the bank's NPL formation has been declining every quarter.

The coverage ratio "also edged up in the fourth quarter," he reported.

Having increased its loan books by 9.41% to 13.06 trillion yuan at the end of December, ICBC recognized 1.62% as nonperforming and 4.47% as special-mention loans, up 0.12 and 0.11 point.

Yi believes that the steady recovery of the Chinese economy -- attested by stronger corporate demand for borrowing and capital strength -- means that asset quality will take a turn for the better this year. But he stressed that ICBC needs to carry on with asset disposal.

"We are prepared to charge off 200 billion yuan of bad debts with a provision of 65 billion yuan this year," Yi said. This represents 40% of the total write-offs over the past three years.

ICBC reported Thursday that net profit attributable to shareholders edged up 0.4% on the year to 278.25 billion yuan for 2016, or 0.77 yuan per share. CCB's net profit grew 1.45% to 231.46 billion yuan, or 0.92 yuan per share.

Both saw return on average equity decline to new lows. ICBC's fell from 23.02% in 2012 to 15.24%, while CCB's skidded from 21.98% to 15.44%.

Despite management's optimism, the absolute amount of bad loans for both banks was substantial. For ICBC, nonperforming loans at year-end came to 211.8 billion yuan, up 18%, while CCB's were up 8% at 178.69 billion yuan. Special-mention loans continued to surge, with ICBC ending 2016 at 584.01 billion yuan and CCB at 337.09 billion yuan, up 12% and 11%.

ICBC's coverage ratio dropped 19.65 points on the year to 136.69% -- below the regulatory requirement of 150% -- against CCB's 150.36%, down 0.63 point.

ICBC declared a cash dividend of 0.23 yuan per share. Its Hong Kong-listed shares slipped 0.97% to 5.12 Hong Kong dollars on Thursday, for a 10.11% year-to-date return. But its Shanghai-listed shares added 0.63% to 4.81 yuan the same day, for a year-to-date return of 9.07%.

Proposing a cash dividend of 0.28 yuan per share, CCB saw its Hong Kong-listed shares drop 1.25% to $HK6.33, returning 6.03% year to date. Its Shanghai-listed shares closed flat at 5.93 yuan, for a year-to-date return of 9.01%.

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