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Business trends

Surge in bad loans squeezing profit at China's biggest banks

China's home prices are on the decline, especially in smaller cities.

HONG KONG -- For China's banks, bad debt is a small but quickly growing problem. The outstanding balance of bad loans at the nation's four largest banks stood at 384.7 billion yuan ($62.6 billion) as of the end of June, up 13.2% from six months before.

     With China's economy slowing, earnings among smaller companies are stagnating. This, combined with the souring property market, is taking a toll on lenders. Though bad loans make up only around 1% of total lending by China's banks, they are already putting a squeeze on profits.

Triple threat

China's four biggest banks are Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), and Bank of China (BOC).

     For the January-June half, they reported a collective net profit of 472.5 billion yuan, a rise of just 9.6% from the first half of 2013, compared to the double-digit growth of the past. The biggest of the four, Industrial & Commercial Bank of China, reported the least growth. Its net profit rose just 7.0%, the smallest gain since right after the Lehman shock, when net profit in 2009 grew just 2.9%.

     The rise in bad loans, especially from companies in the manufacturing and wholesale and retail sectors, is one of the main factors behind the smaller profit growth.

     With the economy slowing in the first half and exports losing steam, there was a surge in bad loans from smaller companies in coastal provinces such as Guangdong, Jiangsu and Shandong, said Bank of China Vice President Zhang Jinliang.

     Additionally, the Chinese government is restructuring glutted sectors, including steel. In the process, the price of steel has dropped. As a result, an increasing number of steel traders, stuck with large inventories, have fallen behind on their loans, Industrial & Commercial Bank of China President Yi Huiman said.

     Falling property prices are also affecting the banks. Homes in cities such as Wenzhou, Zhejiang Province, are now selling for half their peak prices, and individuals are increasingly unable to repay their loans.

      There have been repeated reports of banks disposing of properties put up as collateral. "In Jiangsu Province and Zhejiang Province, more and more people are stopping their loan payments, leading to a rise in bad loans," said one person in charge of risk management at the Agricultural Bank of China.

     The overall amount of lending is on the rise in China, however, and with banks actively selling or writing off their bad debt, the ratio of such loans is still low.

Real concerns

Industrial & Commercial Bank of China President Yi Huiman emphasized that China's banks have relatively little in the way of bad loans compared to their international peers.

     But as one analyst pointed out, "China's banks are not strict in their asset assessment."

     The rise in bad loans is beginning to affect smaller companies. Banks, wanting to maintain a healthy quality of assets, have tightened the screws on new lending to real estate companies and to businesses in sectors where supply gluts remain a concern. In some cases, the banks are setting annual interest rates of more than 10%.

     With a growing number of smaller companies complaining of a credit crunch, the State Council is pushing for an expansion of lending to these businesses and to farmers. But in July the amount of new loans plunged, and some are voicing concerns that the situation could harm the real economy.

     Banks' total bad loans increased by 102.3 billion yuan in the first half, according to the China Banking Regulatory Commission. That already exceeds the 99.2 billion yuan increase for all of 2013. Moreover, roughly half of this rise sits on the books of China's four big banks.

(Nikkei)

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